The Fed’s quarter-point hike in its key rate, which it had pinned near zero since a pandemic recession struck the US two years ago, marks the start of its effort to curb high inflation that has followed the recovery from that recession. The rate hikes will eventually mean higher loan rates for many consumers and businesses.
The central bank’s policy-makers expect inflation to remain elevated and to end 2022 at 4.3 percent, according to updated quarterly projections they released on Wednesday. That’s far above the Fed’s 2 percent annual target. The officials also now forecast much slower economic growth this year, of 2.8 percent, down from a 4 percent estimate in December.
Chair Jerome Powell is steering the Fed into a sharp U-turn. Officials had kept rates ultra-low to support growth and hiring during the recession and its aftermath. As recently as December, Fed officials expected to raise rates just three times this year.
Now, a projected seven hikes would raise the Fed’s short-term rate to 1.875 percent at the end of 2022. It could make half-point increases at future meetings.
Fed officials also forecast four additional hikes in 2023, boosting its benchmark rate to 2.8 percent. That would be the highest level since March 2008. Borrowing costs for mortgage loans, credit cards and auto loans will likely rise as a result.
Powell is hoping that the rate hikes will achieve a difficult and narrow objective of raising borrowing costs enough to slow growth and tame high inflation, but not to the extent that the economy tips back into recession.
Many economists worry, however, that with inflation already so high — it reached 7.9 percent in February, the highest in four decades — and with Russia’s military operations in Ukraine driving up gas prices, the Fed may have to raise rates even higher than it now expects.
By its own admission, the central bank underestimated the breadth and persistence of inflation after the pandemic struck. Some economists say the Fed made its task riskier by waiting too long to begin raising rates.
Since its last meeting in January, the challenges and uncertainties for the Fed have escalated. Russia’s actions and the West’s response have magnified the cost of oil, gas, wheat and other commodities. Additionally, China has closed ports and factories again to try to contain a new outbreak of Covid-19, which will likely worsen supply chain disruptions. (AP)