The Federal Reserve raised interest rates by a quarter percentage point and signaled hikes at all six remaining meetings this year, launching a campaign to tackle the fastest inflation in four decades even as risks to economic growth mount.
Policy makers led by Chair Jerome Powell voted 8-1 to lift their key rate to a target range of 0.25% to 0.5%, the first increase since 2018, after two years of holding borrowing costs near zero to insulate the economy from the pandemic. St. Louis Fed President James Bullard dissented in favor of a half-point hike, the first vote against a decision since September 2020.
“The American economy is very strong and well positioned to handle tighter monetary policy,” Powell told a press conference Wednesday following a meeting of the Federal Open Market Committee. “We are attentive to the risks of further upward pressure on inflation and inflation expectations.” He also said that officials could move faster on policy tightening if needed.
The hike is likely the first of several to come this year, as the Fed said it “anticipates that ongoing increases in the target range will be appropriate,” and Powell repeated his pledge to be “nimble.”
The Fed's New Dot Plot
“I saw a committee that is acutely aware of the need to return the economy to price stability,” he told reporters, characterizing the mood around the the table as policy makers debated the outlook. “It is determined to use its tools to do so.”
In the Fed’s so-called dot plot, officials’ median projection was for the benchmark rate to end 2022 at about 1.9% -- in line with traders’ bets but higher than previously anticipated -- and then rise to about 2.8% in 2023. They estimated a 2.8% rate in 2024, the final year of the forecasts, which are subject to even more uncertainty than usual given Russia’s invasion of Ukraine and new Covid-19 lockdowns in China are buffeting the global economy.
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” the FOMC said in its policy statement following the two-day meeting in Washington, the first held in person -- rather than via videoconference -- since the pandemic began. “The implications for the U.S. 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.”
The S&P 500 index briefly erased its gains on the decision before rebounding after Powell played down the risk of a recession and declared the economy strong enough to withstand tighter policy.
The Fed said it would begin allowing its $8.9 trillion balance sheet to shrink at a “coming meeting” without elaborating. Powell said officials had made good progress this week in nailing down their plans and could be in a position to begin the process at their May meeting, though the FOMC had not taken a decision to do so. The purchases of Treasuries and mortgage-backed securities, which concluded this month, were intended to provide support to the economy during the Covid-19 crisis and shrinking the balance sheet accelerates the removal of that aid.
The statement omitted previous language saying that the economy’s path depended on the course of the coronavirus, though it kept a reference to the pandemic’s impact on inflation.