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Post: The Fed: Fed raises interest rates for first time in four years and plots series of hikes to fight inflation

The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter percentage point and laid out plans for a more aggressive strategy of “ongoing increases” in the months ahead to combat high inflation.

With inflation running at a 40-year peak, the Fed is shifting aggressively away from its two-year old stimulative stance that cushioned the economy during the pandemic. 

The Fed now sees its policy rate hitting 1.9% by the end of this year, jumping to 2.8% in 2023 and staying at that level in 2024. Rates at 2.8% would start to dampen economic growth, according to Fed calculations.

The Fed’s inflation-fighting medicine was stronger than many on Wall Street had expected.

“The Fed threw down the gauntlet as it confronts a broad inflation upsurge, twinning a widely expected and tame quarter point rate hike with a much sterner message about what lies ahead,” said economist Avery Shenfeld of CIBC Economics. 

Bill Adams, chief economist for Comerica Bank in Toledo, agreed that the Fed’s statement and “dot-plot” were hawkish.

Fed Chairman Jerome Powell had telegraphed the rate increase earlier this month. There was one dissent, with St. Louis Fed President James Bullard arguing for a 50 basis point rate hike.

Powell said “every meeting was a live meeting” for rate hikes, and added that 50 basis point moves down the road couldn’t be ruled out.

Powell said the Russian invasion of Ukraine could hurt the U.S. economy in the short run and is already putting upward pressure on inflation due to higher oil prices.

The conflict is also likely to disrupt already-strained global supply chains, a big source of the rapid increase in prices and that could delay a slowdown in inflation until later in 2022.

“I guess I would say the expectation still is that inflation will come down in the second half of this year, but we still expect inflation to be high this year,” Powell said in a press conference after the Fed’s regular two-day meeting.

The Fed projected inflation would average 4.3% at the end of 2022, up from its prior 2.6% forecast. The last time the central bank expected inflation to top 3% was in 2007.

Inflation is then projected to slow to 2.7% in 2023 and 2.3% in 2024.

Read: Here’s everything Powell said about inflation

Before the pandemic prices rose an average of less than 1.5% a year in the prior decade.

The economy, meanwhile, is seen downshifting to a 2.8% growth rate in 2022 — well below the Fed’s prior 4% forecast for growth domestic product.

But the Fed projected the unemployment rate would hold steady over the next three years.

The Fed chairman said the risks of a recession over the next year were low.

Fed watchers were not so sure.

“The most likely outcome is still that the Fed engineers a gradual slowing in inflation over the next couple of years while growth continues, although with a few bumps along the way. But if the central bank makes a mistake and raises rates too quickly, the U.S. economy could fall into recession in late 2022 or in 2023,” said Gus Faucher, chief economist at PNC Financial.

Fed funds and balance sheet

The Fed did not give details of how it will shrink its balance sheet, as some economists had expected. The central bank said only it plans to begin the process “at a coming meeting.”

During his press conference, Powell said the central bank had made excellent progress on the details and the central bank could move to shrink the balance sheet as soon as the next meeting on May 4.

Financial markets expect the Fed to raise its policy rate by six quarter-point moves this year.

U.S. stocks
DJIA,
+1.55%

SPX,
+2.24%

stayed in solid positive territory after the Fed decision

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.178%

moved higher to 2.19%.

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