Federal Reserve raises key rate by quarter-point from near 0 in effort to tame inflation

WASHINGTON – The US Federal Reserve launched a high-risk effort on Wednesday to tame the worst inflation since the early 1980s, raising the short-term benchmark interest rate and signaling up to six additional interest rate hikes this year.

An increase in its key interest rate by a quarter of the unit, which it had zeroed since the pandemic recession two years ago, marks the beginning of its effort to curb the high inflation that followed the recovery from the recession. Rising interest rates will eventually mean higher lending rates for many consumers and businesses.

Central bank policymakers expect inflation to remain high, closing at 4.3% in 2022, according to updated quarterly forecasts released Wednesday. This is well above the Fed’s 2% annual target. Officials also now forecast much slower economic growth this year, 2.8%, from its estimate of 4% in December.

The Fed forecast for numerous additional interest rate hikes in the coming months derailed a strong rally on Wall Street, causing stocks to fall and bond yields to rise. Most economists, however, say much higher rates are too late to combat the escalation of inflation across the economy.

“With unemployment below 4%, inflation approaching 8% and the war in Ukraine likely to push prices even higher, this is what the Fed needs to do to bring inflation under control,” Mike said. Fratantoni, chief economist at the Mortgage Bankers Association.

In a statement issued after its last meeting, the Fed noted that Russia’s invasion of Ukraine and the subsequent Western sanctions “are likely to create additional inflationary pressures and burden economic activity.”

President Jerome Powell is leading the Fed into a sharp reversal. Officials had kept interest rates extremely low to support growth and recruitment during the recession and its aftermath. As early as December, Fed officials expected interest rates to rise just three times this year. Now, its projected seven increases will raise the short-term interest rate between 1.75% and 2% by the end of 2022. It could raise interest rates by half a point in future meetings.

On Wednesday, officials also forecast four additional increases in 2023, which would raise the benchmark interest rate to 2.8%. This would be the highest level since March 2008. Borrowing costs on mortgages, credit cards and car loans are likely to increase as a result.

A member of the Fed’s interest rate committee, James Bullard, head of the Federal Reserve Bank of St. Louis. Louis disagreed with Wednesday’s decision. Boulard was in favor of raising interest rates by half a point, a position he has backed in interviews and speeches.

The Fed also said it would begin cutting its nearly $ 9 trillion balance sheet, which has more than doubled in size during the pandemic, “in an upcoming meeting.” This step will also result in a reduction in credit for many consumers and businesses.

Powell hopes interest rate hikes will achieve a difficult and narrow goal: raising borrowing costs fast enough to slow growth and tame high inflation, but not enough to push the economy into recession.

However, many economists worry that with inflation already so high – reaching 7.9% in February, the worst in four decades – and Russia’s invasion of Ukraine pushing up gas prices, the Fed may need to raise interest rates even higher than he now expects and possibly led the economy into recession.

According to its own admission, the central bank underestimated the extent and maintenance of high inflation after the pandemic hit. Many economists say the Fed made its job more risky by waiting too long for interest rates to start rising.

Since its last meeting in January, the challenges and uncertainties for the Fed have escalated. Russia’s invasion has increased the cost of oil, gas, wheat and other commodities. China has closed ports and factories again to try to contain a new COVID outbreak, which will exacerbate supply chain disruptions and possibly further pressures on fuel prices.

Meanwhile, a sharp rise in the average gas price since the invasion, over 60 cents to $ 4.31 a gallon nationwide, will push inflation higher and possibly slow growth – two conflicting trends that it is obviously difficult for the Fed to manage at the same time.

The steady expansion of the economy does provide a cushion against higher interest rates and more expensive gas. Consumers are spending at a healthy pace and employers are continuing to recruit fast. There are still a record 11.3 million jobs, far more than the number of unemployed.


AP Economics author Paul Wiseman contributed to this report.

Copyright © 2022 by the Associated Press. All rights reserved.

Federal Reserve raises key rate by quarter-point from near 0 in effort to tame inflation Source link Federal Reserve raises key rate by quarter-point from near 0 in effort to tame inflation

Related Articles

Back to top button