Fed raises interest rates for 1st time since 2018 to combat inflation

By Marc Arcas

Washington, Mar 16 (EFE).- The United States Federal Reserve moved to tame inflation on Wednesday by hiking its benchmark interest rate for the first time since 2018, a move that comes as the ongoing war in Ukraine threatens to put further upward pressure on consumer prices.

The Federal Open Market Committee, the central bank’s monetary policy-making body voted to raise the federal-funds rate by a quarter of a percentage point to range of between 0.25 percent and 0.5 percent at the end of its latest two-day meeting.

That rate that banks charge each other to borrow or lend excess reserves overnight had been set at a range of between zero and 0.25 percent in March 2020 in a bid to boost an economy battered by Covid-19 triggered lockdowns.

In an official statement at the meeting, the Federal Reserve Board of Governors said it expects to carry out up to six quarter-point rate hikes through the end of 2022.

Under that scenario, the federal-funds rate would be close to 2 percent by year’s end.

Fed officials also said they expect to start reducing the central bank’s $9 trillion asset portfolio in the near future.

The central bank is reversing course and restricting liquidity as it battles an inflation rate that stood at 7.9 percent for the 12 months ended February 2022, up four-tenths of a percentage point from January and the biggest annual gain since January 1982.

“In my view, the probability of a recession within the next year is not particularly elevated,” Fed Chairman Jerome Powell said at a post-meeting press conference when asked if the shift to a restrictive monetary policy could cause an economic contraction.

“Aggregate demand is currently strong and most forecasters expect it to remain so. If you look at the labor market, also very strong,” he added.

Powell said all signs indicate the US economy will not only withstand but also be able to flourish in the face of a less accommodative monetary policy.

He reiterated that the chief cause for concern at the moment is inflation, which “is likely to take longer to return to our price-stability goal (of 2 percent inflation) than previously expected.”

Besides the rate hike, the Fed also updated its economic projections for 2022-2024.

The central bank raised its 2022 inflation forecast to 4.3 percent, up from 2.6 percent in December. It also lowered its projection for gross domestic product growth to 2.8 percent, compared to 4 percent in December.

It still projects an unemployment rate of 3.5 percent for this year and next, although the forecast jobless rate for 2024 climbed by one-tenth of a percentage point to 3.6 percent.

The central bank expects the inflation rate to fall to 2.7 percent and 2.3 percent in 2023 and 2024, compared to 2.3 percent and 2.1 percent in the December projection.

US GDP is forecast to come in at 2.2 percent next year and at 2 percent in 2024. Both of those figures are unchanged from December.

Besides the inflationary pressures that date back several months, the FOMC statement also said Russia’s invasion of Ukraine is causing “tremendous human and economic hardship.

“The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity,” it added.

Powell, for his part, said in his press conference that in addition to direct effects in the form of higher global oil and commodity prices, “the invasion and related events may restrain economic activity abroad and further disrupt supply chains, which would create spillovers to the US economy through trade and other channels.”