The Fed raised rates and projects six more hikes in 2022.

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The Fed raised rates and projects six more hikes in 2022.

The Federal Reserve raised its key interest rate by a quarter percentage point on Wednesday as policymakers took their first decisive step in trying to stave off rapid inflation by cooling the economy.

The Fed had kept rates near zero since March 2020, and the decision marked its first increase since 2018. Policymakers forecast six more similar-sized increases during 2022 as inflation approaches 40-year highs.

“With the appropriate strengthening of monetary policy stance, the Committee expects inflation to return to its 2 percent objective and the labor market remains strong,” the Fed said in its March statement. Target range would be appropriate. ,

The Fed is at an inflection point after a two-year effort to help the economy recover from the damage caused by the global pandemic. While the coronavirus continues to disrupt commerce around the world, the economy of the United States has recovered rapidly. America’s job market has swiftly bounced back from the job losses of the pandemic, which pushed unemployment to 14.7 percent, and businesses are now struggling to find workers.

Growth in consumer spending has helped push the rate of inflation to levels not seen since the 1980s. Instead of echoing the anemic slogans from the 2007-9 recession – one that put millions of applicants out of work and left inflation in check despite years of rock-bottom rates – the pandemic’s boom has been vigorous.

Given inflation, it can also take a lot of heat, which is why the Fed is trying to slow the economy at a more sustainable pace.

“The economy is very strong,” Fed Chairman Jerome H. Calling the recent growth “robust” and the outlook “solid,” Powell said at a news conference after the announcement, adding that the labor market is “extremely tight.”

“Wages are growing at their fastest pace in many years,” he said, noting that inflation is “well above” the Fed’s target and that the supply chain disruption has been larger and longer-lasting than expected. Higher energy prices are driving inflation even further, as is increasing price pressure.

Higher interest rates will seep out through the markets to make mortgages, car loans and borrowing more expensive by businesses. It is expected to slow consumption and investment, dampen demand in the economy and – Fed officials hope – eventually weigh on rising prices.

Central bankers made a more aggressive plan to control inflation than in December, when they last released economic projections. Officials now expect to raise rates to 2.8 percent by the end of 2023 on an average basis, up from 1.6 percent in their earlier estimates. It’s so high that, by the Fed’s own estimates, it could actually be the equivalent of putting the brakes on the economy — not just taking a foot off the gas pedal.

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“He knew his policy didn’t match the economic background, and that’s the catch,” said Priya Mishra, head of global rates strategy at TD Securities. “They’re sending out a strong message that they expect growth to slow down to get inflation under control.”

With the help of their policy changes, central bankers still expect inflation to slow on its own this year, but they have become concerned that a meaningful slowdown will take time.

The Fed’s quarterly economic projections, released along with the rate decision, showed officials expected inflation to be around 4.3 percent at the end of 2022. While that’s less than the 6.1 percent growth in the 12 months through January, it’s well above the Fed’s target. of 2 percent.

James Bullard, chairman of the Federal Reserve Bank of St. Louis, voted against the committee’s decision because he favored a larger interest rate hike of half a percentage point.

The Fed in its statement directly addressed the potential economic impacts of Russia’s invasion of Ukraine.

“The invasion of Ukraine by Russia is causing tremendous humanitarian and economic hardship,” Fed officials said in their statement. “The implications for the US economy are highly uncertain, but in the near-term the attack and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

Speaking at the news conference, Mr. Powell said the invasion of Ukraine and related incidents pose a “negative risk”.

While the Fed is raising rates partly because inflation is so fast, officials have also eased into labor market progress. Unemployment has fallen sharply, job opportunities are plentiful, and there are few workers to move around.

The Fed aims for both price stability and maximum employment, and central bank officials have indicated that the labor market is meeting that latter target, although they expect more workers to be more likely to catch up with the coronavirus as fears ease up. and school-related child care issues. Shutdowns and other virus mitigation measures fade.

A booming job market has helped push wage growth even further as employers are competing for workers and trying to retain their existing employees by paying more. Higher compensation could fuel inflation down the road, some economists worry: It gives workers more means to spend, and it leaves firms trying to cover climbing labor costs.

The Fed is trying to avoid a situation in which both consumers and companies are led to believe that prices will continue to rise rapidly year after year. Higher inflation expectations can prompt consumers to accept the increase in costs, ask workers for larger increases and give businesses confidence to continue raising prices.

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The question is how far the central bank will have to go to ensure that price gains slow and inflation expectations remain under control.

Central bankers are hoping to engineer a soft landing: a situation where they can slow growth to a maintainable level without derailing the economy and causing a recession. Mr. Powell has made it clear that he is ready to do anything to achieve price stability.

Asked about that calibration on Wednesday, Mr. Powell said that, in his view, “the likelihood of a recession within the next year is not particularly increased.” He cited strong demand, a healthy labor market and other conditions which he said were “signs” that the economy would be able to thrive “in the face of less liberal monetary policy”.

In the 1980s, the Fed pushed interest rates higher – above inflationary levels – to slow the economy and reduce inflation. In the process, it raised unemployment to around 11 percent.

Most economists have said that such a painful recurrence is unlikely, although many have warned that a gentle, easy end to the current inflationary burst is not sure.

Jason Furman, an economist at Harvard University, said of the soft landing’s prospect, “It’s too early to say it’s a pipe dream: It’s been a crazy year.” “It seems, with each passing month, increasingly unlikely.”

For many, the Fed’s decision to raise interest rates is already obvious: Mortgage rates have climbed to signal the central bank that it will raise interest rates and, in the coming months, begin trimming its balance sheet of bond holdings. will do it.

Whether they move higher depends on how fast and how high the Fed plans to raise rates, and how it approaches its balance sheet runoff plans.

“I could see mortgage rates moving in either direction, depending on how they answer those questions,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, said before the Fed meeting.

As higher rates weigh on hiring, they can eventually slow wage growth, and higher borrowing costs are likely to keep property prices – including stock and home prices – as high as they are for buyers and buyers. Attract investors.

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