Fed hikes rates, signals aggressive turn against inflation
The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point and projected its policy rate would hit a range between 1.75% and 2% by year’s end in a newly aggressive stance against inflation that will push borrowing costs to restrictive levels in 2023.
In a new policy statement marking the end of its full-on battle against the coronavirus pandemic, the U.S. central bank flagged the massive uncertainty the economy faces from the war in Ukraine and the ongoing health crisis, but still said “ongoing increases” in the target federal funds rate “will be appropriate” to curb the highest inflation in 40 years.
The statement dropped direct reference to the coronavirus pandemic but instead cited the war in Ukraine as creating “additional upward pressure on inflation” and weighing on economic activity.
The interest rate path shown in new projections by policymakers is tougher than expected, reflecting Fed concern about inflation that has moved faster and threatened to become more persistent than expected, and put at risk the central bank’s hope for an easy shift out of the emergency policies put in place to fight the fallout from the pandemic.
Even with the tougher rate increases now projected, inflation is expected to remain above the Fed’s 2% target, remaining at 4.1% through this year and dropping only to 2.3% through 2024. Economic growth is seen at 2.8% this year, a sharp drop from the 4.0% growth projected in December.
The unemployment rate is seen dropping to 3.5% this year and remaining there next year, but is projected to rise slightly to 3.6% in 2024.
The new statement said the Fed expects to begin reducing its nearly $9 trillion balance sheet “at a coming meeting,” a topic likely to be addressed further by Fed Chair Jerome Powell in a news conference due to begin at 2:30 p.m. EDT (1830 GMT).
St. Louis Fed President James Bullard was the only policymaker to dissent in the Fed’s decision.