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Fed Lifts Rates for First Time in Three Years as Fight Against Inflation Begins

Published 03/16/2022, 02:01 PM
Updated 03/16/2022, 03:42 PM
© Reuters.

By Yasin Ebrahim

Investing.com -- The Federal Reserve raised interest rates on Wednesday for the first time in more than three years and signaled seven rate hikes for this year to bring inflation under control.

The Federal Open Market Committee raised its benchmark rate to a range of 0.25% to 0.5% from a 0%-to-0.25% range previously. 

The start of liftoff on interest rates was widely expected as Federal Reserve Chairman Jerome Powell said earlier this month that he would favor a 0.25% hike at the March meeting.

The March rate increase is expected to be followed up with several more hikes later this year, as Fed members have turned increasingly hawkish since December.

The Fed is now forecasting its benchmark rate to rise to 1.9% in 2022, well above the 0.9% forecast in December, pointing to about seven 0.25% rate hikes in total for this year, the Fed’s Summary of Economic Projections showed.

Ahead of the meeting, Wall Street was pricing about six to seven rate hikes for this year.

For 2023, the Fed sees the Federal funds rate at 2.8%, up from its prior projection of 1.6%. The Fed's terminal rate for Fed funds – the rate that coincides with its mandate of full employment and stable inflation – was downgraded to 2.4% from 2.5% previously. 

The start of Fed’s rate-hike cycle hike comes as the central bank looks to step up its fight against inflation to ensure elevated price pressures don’t become entrenched.

The core personal consumption expenditures price index, the Fed’s preferred inflation measure, jumped to 5.2% in February, the biggest increase since April 1983.

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Many have argued that the central bank has left it too late to tackle inflation, and now finds itself having to play catch up. But tightening too aggressively into an economy that is expected to slow, runs the risk of a recession or even worse, stagflation.

The latest projections from the Fed do little provide comfort against these concerns. Fed members downgraded expectations on economic growth, while the pace of red-hot inflation is forecast to continue.

The economy is expected to grow by 2.8% in 2022, down from a prior estimate of 4%, the estimate for the unemployment rate was unchanged from December at 3.5%, while the pace of inflation is forecast to accelerate to 4.1% from 2.7% previously.  

In his press conference that followed the monetary policy statement, Powell pushed back against recession fears. "[W]e feel the economy is very strong and well positioned to withstand tighter monetary policy."

The road to price stability for the Fed will be long and has been paved with more headwinds in the wake of the Russia-Ukraine war pushing prices even higher.

"The invasion of Ukraine by Russia is causing tremendous human and economic hardship," the Fed said in a statement. "The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity."

“Powell clearly understands that the Fed is going to really have to focus on inflation now as it's gotten far beyond their expectations,” Dean Smith, chief strategist and portfolio manager at FolioBeyond said in an interview with Investing.com on Tuesday.

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“But this isn’t something that you can reduce in a short period … it's going to take a while,” Smith added.

The conclusion of the March meeting also draws the curtain on the Fed’s monthly bond purchase programme, or quantitative easing programme, which played a major role in cushioning the economy from the pandemic impact.  

With the QE now in the rearview mirror, the Fed has been weighing options on how to reduce the size of its nearly $9 trillion balance sheet. Powell said "excellent progress" had been made on a plan to shrink the balance sheet, which could be implemented "as soon as our next meeting in May."

"The shrinkage of the balance sheet ... might be the equivalent of another rate increase," Powell added.

Latest comments

Too little too late
I don’t even read the article Just come straight to the comments. You guys are mostly right while the article is mostly fluff
Stock price is more important than the cost of living
we've had next to zero interest rates for years. Now a rate hike to a whopping 1-2% is being against the cost of living?
We need a 10% rate hike, not a mere 0.25%. The real inflation rate is well over 10% already
Yea, they only care about the rich as usual.
Fighting inflation with a pool noodle. I can't believe I have to seriously consider changing my relationship with the United States Dollar.
Raising the FF rate 1/4 point is like giving your 10 year old son a dime to buy a new iPhone....no effect and none intended. All optics.
I think the fed got it wrong. Yet, again.
Awesome housing will go down and ill buy in cash just like i planned. Took my money out of market late 2021. Doing well.
Inflation doesn’t discriminate. Everything will go up. Stocks, Food, Housing etc. 0.25 rate will not crash the Market. Only when Fed Stops printing. They will not stop
ive set myself up the last 4 years preparing for this. Im more than fine.
moved my assets (70%) into fixed income in 2021 people said i was nuts i said im willing to miss some more upside to preserve the gains i made the last 4 years.
with that high inflation it will take sometime to be reduced to it's rightful target.
I can already see inflation ending!
👩‍🦯
i still doubt they can do 7. along the way crap will 100% surface again.
What an overreaction. Everyone knew this coming. If this was 0.5% increase then sell could be understood
that not the point. the future rises are
Should be priced in a long time ago. Not really news!
That assumes you’re dealing with educated investors. Nothing is priced in anymore. It’s all emotional.
Bad days ahead for USA .25% that's negligible to takle inflation.Foooools are everywhere in Our current Indian government and same applies to states.
Initially, your site wrote 0.25 and is 0.5 points. INVESTING.COM You are pathetic.
now Indian markets foll next day
kuch nahi hoga
now Indian markets foll next day
"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong." Return to 2 percent inflation?  Que the laugh track...
Corporate and retail debt interest rates rising, not good 🤔📉.
Bitcoin has 1.7% inflation, Buy Bitcoin.
US debt clock spinning out of control
Its time to buy gold man…..before we get killed with rates and inflation
This is a fight the fed's gonna lose.
party finish the problem is very big
quarter point...brace yourselves for much higher inflation
what a wuss. looking at 10% inflation in March and the Fed did this? We are in major trouble
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