The Fed begins the fight against inflation with a hike in key rates | News, Sports, Jobs


Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee hearing, Thursday, March 3, 2022, on Capitol Hill in Washington. (Tom Williams, Pool via AP)

WASHINGTON (AP) — The Federal Reserve on Wednesday launched a high-risk effort to rein in the worst inflation since the early 1980s, raising its benchmark short-term interest rate and signaling up to six more rate hikes this year.

The quarter-point hike in its key rate, which it had pinned near zero since the start of the pandemic recession two years ago, marks the start of its efforts to rein in the high inflation that followed the exit. of recession. Rate hikes will eventually mean higher lending rates for many consumers and businesses.

The central bank, in a policy statement, accompanied by quarterly projections and remarks by Chairman Jerome Powell at a press conference, pointed to a somewhat more aggressive approach to rate hikes than many had expected. analysts.

Projections showed that seven of 16 central bank policymakers favored at least a half-point rate hike this year, suggesting that such a large increase “is a live possibility”, said Michael Feroli, economist at JPMorgan Chase.

At his press conference, Powell stressed that he was confident the economy was strong enough to withstand higher interest rates. But he also clarified that the Fed is focused on whatever it takes to bring inflation down, over time, to its annual target of 2%. Otherwise, Powell warned, the economy may not sustain its recovery from the pandemic recession.

“We are fully aware of the need to restore price stability,” said the Fed Chairman. “In fact, it’s a prerequisite for achieving the kind of labor market we want. You cannot have maximum employment for an extended period without price stability.

The Fed also released a series of quarterly economic projections on Wednesday that underscore the potential for prolonged interest rate hikes in the months ahead.

Seven hikes would take its short-term rate to between 1.75% and 2% by the end of 2022. Fed officials also plan four more rate hikes in 2023, which would take its benchmark rate to 2.8%.

This would be the highest level since March 2008. Borrowing costs for mortgages, credit cards and auto loans will likely rise accordingly.

“Obviously, inflation has moved to the forefront of Fed thinking,” said Tim Duy, chief US economist at SGH Macro Advisers.

Central bank policymakers expect inflation to remain elevated, ending 2022 at 4.3%, according to quarterly projections they released on Wednesday. Officials are also now forecasting much slower economic growth this year, at 2.8%, compared to an estimate of 4% in December.

But many economists worry that with inflation already so high – it hit 7.9% in February, the worst in four decades – and with Russia’s invasion of Ukraine pushing up gas prices, the Fed could having to raise rates even higher than it now expects and potentially causing a recession.

By its own admission, the central bank underestimated the magnitude and persistence of high inflation after the pandemic hit. And many economists say the Fed has made its job riskier by waiting too long to start raising rates.

Fed projections show that by the end of next year, policymakers expect their short-term rate to be higher “neutral” — the level at which they believe that the rate neither fuels nor slows down economic growth.

Roberto Perli, an economist at Piper Sandler, questioned Powell’s assurances that the economy could sustain such high rates.

“In the past, each time the Fed has come close to – let alone exceeded – neutrality, the economy has weakened significantly,” Perli wrote in a note to clients. “The risk of recession in 2023 and beyond is increasing.”

Still, Powell downplayed the likelihood of an economic setback.

“The probability of a recession next year is not particularly high,” he said.

At his press conference, Powell said he expects inflation to ease later this year as supply chain bottlenecks ease and more Americans return to the labor market. work, easing the upward pressure on wages.

He also suggested that over time, the Fed’s higher rates will reduce consumer spending on interest rate-sensitive items like automobiles and cars. Americans may also be buying less as credit card rates rise. These trends would eventually reduce companies’ demand for workers and slow wage increases, which are taking place at a robust 6% annual rate, and ease inflationary pressures.

Powell noted that there are near record numbers of job openings, leaving 1.7 jobs available, on average, for every unemployed person. As a result, he said he believes the Fed can reduce demand for workers and wage growth without increasing unemployment.

“All signs point to a strong economy,” he said, “which will be able to prosper in the face of a less accommodative monetary policy.”

The Fed’s forecast for many more rate hikes in the coming months initially disrupted a strong rally on Wall Street, weakening equity gains and pushing bond yields higher. But stock prices more than recouped their gains shortly after the start of the news conference.

Most economists say significantly higher rates are long overdue to combat escalating inflation across the economy.

“With unemployment below 4%, inflation close to 8% and the war in Ukraine likely to put even more upward pressure on prices, this is what the Fed needs to do to rein in the inflation,” he added. said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

Powell points the Fed towards a sharp turn. Officials had kept rates extremely low to support growth and hiring during the recession and its aftermath. As recently as December, Fed officials expected to raise rates only three times this year.

A member of the Fed’s rate-setting committee, James Bullard, head of the Federal Reserve Bank of St. Louis, objected to Wednesday’s decision. Bullard favored a half-point rate hike, a stance he has defended in interviews and speeches.

The Fed also said it would start trimming its nearly $9 trillion balance sheet, which has more than doubled in size during the pandemic. “at a future meeting.” This measure will also have the effect of tightening credit for many consumers and businesses.

Since its last meeting in January, the challenges and uncertainties for the Fed have intensified. The invasion of Russia amplified the cost of oil, gas, wheat and other raw materials. China has again closed ports and factories in an attempt to contain a new COVID outbreak, which will worsen supply chain disruptions and likely further pressure on fuel prices.

In the meantime, the sharp rise in average gasoline prices since the invasion, up more than 60 cents to $4.31 a gallon nationwide, will drive up inflation while likely slowing the growth – two contradictory trends that are notoriously difficult for the Fed to manage simultaneously.



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