The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point, its first hike since 2018 and the beginning of what US central bank officials signaled will be a series of rallies this year with further increases expected in all six remaining policies. the meeting.
At the end of its two-day policy meeting on Wednesday, the Federal Open Market Committee raised the federal funds rate by a quarter of a percentage point, raising the target range to 0.25 to 0.50 percentage points. hundred. It is the latest milestone for the US economy in its post-pandemic recovery and the strongest step to date to combat the highest inflation in the world. four decades.
In a news conference after the meeting, Jay Powell, the Fed chair, said the committee raised rates “in light of an extremely tight labor market with high inflation” and that it “anticipates that an increase in continuously within the target range for federal funds the rate will be appropriate”.
However, the FOMC did not unanimously support a quarter point increase with James Bullard, the president of the St Louis Fed, disagreeing in favor of a half point increase.
Powell remains open to raising rates by more than a quarter this year, and said the committee is “deeply aware of the need to bring the economy back to price stability and is determined to use Use our tools to do exactly that.”
Fed officials were quick to revise their rate forecasts higher this year than they did three months ago, when they had already revised their rate forecasts higher this year. forecast the rate increases by three quarters in 2022, followed by another five points in 2023 and 2024.
The so-called dot plot of top officials’ individual rate projections now heralds six more hikes in 2022, in addition to the move in March.
At least three increases have been introduced in 2023, bringing the share of capital allocated to 2.8%, above the “neutral” position that neither promotes nor constrains growth. A majority of Fed officials forecast a neutral rate of 2.4%. No rate hikes are forecast in 2024.
Underscoring the magnitude of the hawkish shift that has taken place in just a few months, officials have been as divided on the need to raise rates this year as as recently as September.
Prices of US stocks and government bonds gyration after publication. Yields on the benchmark 10-year Treasury note hit a nearly three-year high shortly after the news, before falling back to 2.17%. Bond yields decrease as prices rise.
The S&P 500 quickly turned negative after the Fed statement, before recovering strongly later in the session, up 2.2%. The tech-heavy Nasdaq Composite was up 3.8%.
The Fed’s adoption of tighter monetary policy comes despite the dramatic escalation stemming from Russia’s invasion of Ukraine. The European Central Bank also adopt a more positive stance This month, scaling back its bond-buying plans as the war raised inflation expectations.
Powell acknowledged that geopolitical uncertainty is clouding the outlook and stressed that the conflict is likely to cause “additional pressure on short-term inflation here and also on economic activity.” “.
While central banks often delay major policy decisions during times of intense conflict to avoid exacerbating volatility, rising inflation and extremely strong labor markets have made The Fed must push first.
Fed officials on Wednesday also revised higher their inflation forecasts, based on the personal consumption expenditures price index. The median estimate for year-end core inflation, which includes volatile items like food and energy, rose to 4.1%, from 2.7% in December. Next year’s estimates. also increased, with most officials now forecasting the core PCE index to fluctuate between 2.6% and 2.3% in 2024. It is currently at 5.2%, much higher than Fed’s 2% target.
Bob Michele, chief investment officer at JPMorgan Asset Management, said the decision shows “the Fed is quite concerned about inflation.” “There’s still a lot of reopening coming up and they need to continue to normalize things.”
Brian Smedley, chief economist at Guggenheim Partners, said the Fed has “recognized the war in Ukraine. . . are adding pressure on inflation”, adding: “They also acknowledge growing price pressures, which will require a stronger policy response.”
The median estimate for US economic growth also fell to 2.8% from the 4% forecast in December, while the unemployment rate forecast held steady at 3.5%. A majority of Fed officials predict the unemployment rate will rise to 3.6% by 2024.
The Fed also hints that its massive balance sheet will soon shrink — it more than doubled to $9 billion during the pandemic as the central bank hoards government bonds as a part in efforts to boost the economy.
Powell said the committee is finalizing a plan to begin reducing its holdings of mortgage-backed securities by the Treasury agency and will release more details at its meeting in May.
Additional reporting by Eric Platt and Kate Duguid
