The Federal Reserve announced Wednesday it would raise its interest rate target by a quarter percentage point in an effort to curb soaring inflation, a major step away from its pandemic-era emergency policies.
Fed officials, as a group, also indicated that they expect seven or eight rate hikes over the course of 2022 — a much higher number than the three that were projected during the last quarter. One unnamed participant is pushing for up to a dozen rate hikes, according to Wednesday’s release. The urgency in raising rates is a reaction to the high rate of inflation, which officials now see running significantly higher over the course of 2022.
The Fed announced the move, which was thought by many economists to be overdue, after a much-anticipated two-day meeting of the Federal Open Market Committee. Inflation has been running much hotter than many had expected, with consumer prices reaching a breakneck 7.9% for the 12 months ending in February.
“The economy is very strong, and against the backdrop of an extremely tight labor market and high inflation, the committee anticipates that ongoing increases in the target range for the federal funds rate will be appropriate,” Powell said Wednesday during a news conference after the meeting. “In addition, we expect to begin reducing the size of our balance sheet at a coming meeting.”
The spiraling inflation has signaled to the central bank that its efforts to boost spending in the wake of the pandemic were left in place too long. It also has damaged President Joe Biden’s approval ratings and undercut his efforts to enact major spending measures.
The quarter-point hike, also known as a 25 basis point hike, was more modest than some economists had hoped for, with some advocating a full half percentage point increase, which would represent the central bank effectively enacting two rate hikes right out of the gate.
Russia invaded Ukraine at the end of last month, and since then, markets have been in for a wild ride. By going with a smaller rate hike, the Fed and Chairman Jerome Powell are hoping to show some form of stability amid the chaos of the geopolitical situation. In fact, the markets have already been pricing in the quarter-point hike after Powell told Congress that he was contemplating the increase.
In a statement after the meeting, the FOMC said the implications of the Russian war in Ukraine for the U.S. economy “are highly uncertain,” but in the short term, the war and related events are likely to add upward pressure on inflation and weigh on economic activity.
After its Wednesday meeting, the central bank also released updated projections for inflation, gross domestic product growth, and employment.
The median Fed official now sees inflation at 4.3% by the end of the year, compared to a December projection of 2.6%. Inflation projections also rose for both 2023 and 2024, reflecting the growing concern about higher prices.
While Fed officials kept their projections for the unemployment rate virtually unchanged at 3.5% in the coming years, they slashed the GDP growth forecast for this year from the December projection of 4% down to 2.8%; officials kept their GDP predictions for next year and 2024 the same.
The Fed has a narrow dual mandate: achieving maximum employment and maintaining price stability (keeping inflation in check). The Fed is now focused on tamping down inflation, given that the country’s employment situation has consistently improved since its trough during the start of the COVID-19 pandemic.
The economy again blew past expectations and added 678,000 jobs in February, an encouraging sign that the labor market is returning to its pre-pandemic strength. The unemployment rate ticked down to 3.8%, according to the Bureau of Labor Statistics, the lowest since the start of the pandemic.
Despite the gains, the country is still millions of jobs short of where it was right before the global health crisis took hold. Additionally, many employers have complained of a labor shortage and are struggling to hire and retain workers.