The Federal Reserve on Wednesday launched a risky effort to tame the worst inflation since the 1970s by raising its short-term benchmark interest rate and potentially signaling as many as seven rate hikes this year.
The Fed’s quarter-point hike in interest rates, which it had kept close to zero since the pandemic recession two years ago, marks the beginning of its efforts to curb the high inflation that followed the recession recovery. The rate hikes will ultimately mean higher borrowing rates for many consumers and businesses.
Central bank policymakers expect inflation to remain elevated, ending 2022 at 4.3%, according to updated quarterly forecasts they released on Wednesday. That’s well above the Fed’s target for the year of 2%. Officials are also now forecasting much slower economic growth this year of 2.8%, compared to its December estimate of 4%.
Chairman Jerome Powell is steering the Fed into a sharp about-face. Officials had kept interest rates extremely low to support growth and hiring during the recession and its aftermath. As recently as December, Fed officials were expecting only three rate hikes this year. Now, the projected seven hikes would take the short-term rate to 1.875% by the end of 2022. He could hike rates by half a point at future meetings.
Fed officials are also forecasting four more rate hikes in 2023, raising its benchmark rate to 2.8%. That would be the highest level since March 2008. It should raise borrowing costs for mortgages, credit cards and auto loans.
Powell hopes the rate hikes will achieve a difficult and narrow goal: raise the cost of borrowing enough to slow growth and tame high inflation, but not so much as to plunge the economy into recession.
However, many economists worry that inflation is already so high – it reached 7.9% in February, the worst in four decades – and with the Russian invasion of Ukraine pushing up gas prices, the Fed may have to hike rates even more than now expected and possibly plunge the economy into recession.
According to its own statements, the central bank underestimated the breadth and persistence of high inflation after the outbreak of the pandemic. Many economists say this has made the Fed’s job riskier waiting too long to start raising rates.
Since its last meeting in January, the challenges and uncertainties facing the Fed have escalated. Russia’s invasion has pushed up the cost of oil, gas, wheat and other commodities. China has shut down ports and factories again to try to contain a fresh outbreak of COVID that will worsen supply chain disruptions and likely add further pressure on fuel prices.
Meanwhile, the sharp rise in average gas prices since the invasion of more than 60 cents to $4.31 a gallon nationwide will push up inflation and also likely slow growth — two contradictory trends notorious for the Fed are difficult to deal with at the same time.
The steady expansion of the economy offers a certain cushion against higher prices and more expensive petrol. Consumers are spending at a healthy pace and employers continue to recruit quickly. There are still a record 11.3 million job vacancies, far more than the number of unemployed.
https://nypost.com/2022/03/16/federal-reserve-raises-key-interest-rate-to-combat-inflation/ Federal Reserve raises interest rates to fight inflation