(Bloomberg) — The Federal Reserve raised interest rates by a quarter percent and reported hikes in all six remaining meetings this year, launching a campaign to tackle the sharpest inflation in four decades, even as That as well as the risk of spurring economic growth.
Policymakers, led by Chairman Jerome Powell, voted 8-1 to raise their key rate to a target range of 0.5% from 0.25%, the first increase since 2018, two years after the cost of borrowing near zero. To save the economy from the pandemic. St. Louis Fed Chairman James Bullard disagreed in favor of a half-point hike, the first vote against a decision since September 2020.
The hike is likely to be the first of many to come this year, as the Fed said it “hopes that ongoing hikes in the target range will be justified,” and Powell has promised to be “nimble.”
In the Fed’s so-called dot plot, officials’ average projection was for the benchmark rate to end 2022 at around 1.9% — in line with traders’ bets, but higher than before — and then rise to about 2.8% in 2023. . He projected a rate of 2.8% in 2024, the last year of the forecast, subject to even greater uncertainty than Russia’s invasion of Ukraine and new Covid-19 lockdowns in China are ravaging the global economy.
“Russia’s invasion of Ukraine is causing tremendous human and economic hardship,” the Federal Open Market Committee said in a statement after a two-day meeting in Washington on Wednesday. The pandemic started. “The implications for the US economy are highly uncertain, but in the near-term the attack and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
Treasury yields jumped and the curve flattened after the decision. The S&P 500 index erased most of its gains and the dollar index narrowed losses.
The Fed said it would begin allowing its $8.9 trillion balance sheet to shrink “in an upcoming meeting” without detailing it. The purchase of treasury and mortgage-backed securities, which concluded this month, was intended to support the economy during the Covid-19 crisis, and shrinking balance sheets tends to accelerate removal of that aid.
The statement omitted previous language saying that the course of the economy depends on the course of the coronavirus, though it made reference to the impact of the pandemic on inflation.
Powell, who is currently temporarily serving as chairman as he awaits Senate confirmation for a second term, will hold a virtual press conference at 2:30 a.m. Washington time.
For the first time since the early 1990s, the Fed is facing the difficult task of achieving a soft landing for the world’s largest economy. Tighten too slowly and it risks spiraling inflation out of control, requiring even more drastic action. Shift too quickly and the central bank could roll over the markets and propel the economy into recession.
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In new economic projections, Fed officials said they see inflation significantly higher than previously thought, at 4.3% this year, but still coming down to 2.3% in 2024. The forecast for economic growth in 2022 was cut from 4% to 2.8%, while unemployment estimates were slightly changed.
The pivot of tighter monetary policy is sharper than policymakers expected just three months ago, when their average estimate was for just three quarter-point growth this year.
Compelling the momentum is an increase in inflation that has proven to be stronger and more sustained than expected. The consumer price index rose 7.9% in February, the highest since 1982; The Fed’s 2% inflation target is based on a different gauge, the personal consumption spending price index, which rose 6.1% in the 12 months through January.
The Fed had previously held off on raising rates as officials bet that the inflation shock would fade once the economy normalizes after the pandemic slowdown and lockdowns, though they were looking at new Covid-19 variants and data showing a choppy job opening. were cautious in the midst of recovery.
Instead, price gains accelerated amid a mix of massive government stimulus, tightening labor markets, rising commodity costs and supply chains. Powell is also working under the Fed policy framework, adopted in mid-2020, to allow for some above-targeted inflation in hopes of broadening employment.
Critics say the Fed was too slow to change course and is now behind the curve in taking price gains that could be stronger if companies pass on the higher cost to consumers who react by demanding higher wages.
At the same time, the deteriorating picture of inflation has handed Powell political cover for the rate hike as he awaits Senate confirmation for a second term. US households and businesses have reacted with alarm to rising prices, with retail gasoline exceeding $4 a gallon, although that could fall after the latest fall in crude.
Highest priority
President Joe Biden has called controlling inflation his top economic priority, while fellow Democrats worry that a failure to rein in prices could hurt his thin congressional majority in November’s midterm elections.
Powell also touted some calls for a bigger half-point increase, which would have been the first time since 2000. Some on Wall Street believe it could deliver such a salvo in the coming months if inflation doesn’t bounce back.
On the positive side, American households are in a stronger position with an unemployment rate of 3.8% and savings have increased throughout the pandemic.
Bloomberg Economics forecasts the Fed could raise rates to 3.25% sometime next year, the highest since 2008. Policymakers now see their long-term federal funds rate at 2.4% versus 2.5% in its December forecast.
The Fed is not alone in being more aggressive. The European Central Bank made a surprise announcement last week that it would be more aggressive in rolling back bond-buying. The Bank of England is also set to raise rates for a third straight meeting on Thursday, while Brazil’s central bank is predicted to rise by another 100 basis points on Wednesday.
– With assistance from Jordan Yadeau and Liz Capo McCormick.
