The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter percentage point and laid out plans for a more aggressive strategy of “ongoing increases” in the months ahead to combat high inflation.
With inflation running at a 40-year peak, the Fed is shifting aggressively away from its two-year old stimulative stance that cushioned the economy during the pandemic.
The Fed now sees its policy rate hitting 1.9% by the end of this year, jumping to 2.8% in 2023 and staying at that level in 2024.
The Fed’s inflation-fighting medicine was stronger than many on Wall Street had expected.
“The Fed threw down the gauntlet as it confronts a broad inflation upsurge, twinning a widely expected and tame quarter point rate hike with a much sterner message about what lies ahead,” said economist Avery Shenfeld of CIBC Economics.
Fed Chairman Jerome Powell had telegraphed the rate increase earlier this month. There was one dissent, with St. Louis Fed President James Bullard arguing for a 50 basis point rate hike.
Powell said the Russian invasion of Ukraine could hurt the U.S. economy in the short run and is already putting upward pressure on inflation due to higher oil prices.
The conflict is also likely to disrupt already-strained global supply chains, a big source of the rapid increase in prices. That could push off a slowdown in inflation until later in 2022.
“I guess I would say the expectation still is that inflation will come down in the second half of this year, but we still expect inflation to be high this year,” Powell said in a press conference after the Fed’s regular two-day meeting.
The Fed projected inflation would average 4.3% at the end of 2022, up from its prior 2.6% forecast. The last time the central bank expected inflation to top 3% was in 2007.
Inflation is then projected to slow to 2.7% in 2023 and 2.3% in 2024.
Before the pandemic prices rose an average of less than 1.5% a year in the prior decade.
The economy, meanwhile, is seen downshifting to a 2.8% growth rate in 2022 — well below the Fed’s prior 4% forecast for growth domestic product.
Fed funds and balance sheet
In the first of a series of steps to rein in inflation, the Fed on Wednesday raised its policy rate from near zero to between 0.25% and 0.5%. It is the first hike since 2018.
The Fed did not give details of how it will shrink its balance sheet, as some economists had expected. The central bank said only it plans to begin the process “at a coming meeting.”
Financial markets expect the Fed to raise its policy rate by six quarter-point moves this year.
The pace the Fed forecast is much faster than what they laid out in December. It brings the Fed policy rate into “restrictive” territory that will weigh on economic growth.
U.S. stocks DJIA, +0.96% SPX, +1.58% moved lower after the Fed decision
The yield on the 10-year Treasury note TMUBMUSD10Y, 2.168% moved higher after the announcement.