The Federal Reserve is set for its most aggressive liftoff period in decades—and one that’s very different from the last one that began in 2015.
Chair Jerome Powell last week pointed to an economy in “a different situation” from the last interest-rate hiking cycle, highlighting a tighter labor market, the fastest inflation since the 1980s and stronger economic growth.
The last time the central bank raised rates from zero in 2015, the economy was emerging slowly from the global financial crisis and a long recession marked by weak households. This time, the Fed is playing catchup amid decades-high inflation and a swift rebound in demand from the Covid-19 shock.
To tame prices, Powell and his colleagues are prepared to raise interest rates in March, the first of at least three hikes in 2022, according to Wall Street economists. Some see increases at each of the seven remaining meetings this year. Last week, the Fed said it’d be “nimble” and “move steadily,” versus at a “gradual” pace back in 2015.
“It’s night and day,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics Inc. “The last time we were lifting off, the Fed was raising rates in anticipation that inflation was going to get back up to 2%. Now they’re raising rates in an environment where they’re trying to get inflation down to their target.”
Running Hot
In a press conference Wednesday, Powell said that the Federal Open Market Committee was “of a mind” to raise rates in March, and didn’t rule out hiking at every meeting to tame inflation. He also said the labor market was consistent with full employment, pointing to plentiful jobs and higher wages.
Here’s a look at the three main factors Powell cited as a precursor to what is set to be the Fed’s most aggressive one-year hiking cycle in decades:
Inflation
Inflation today is the hottest in nearly 40 years. Consumer prices have skyrocketed amid a confluence of supply-chain constraints—driven by Covid lockdowns and quick reopenings globally—and a dearth of manufacturing and delivery workers. Across the U.S., especially in smaller cities in the heartland, that means higher costs being passed down the supply chain for months ahead.
The most recent figures point to escalating pressures. The personal consumption expenditures price gauge, which measures what Americans pay for goods and services, rose 5.8% in December from the prior year, the most since 1982.
Employment costs rose from the same month in 2021 by the most in two decades—some economists fear that could propel a wage-price spiral in which employers raise prices even further to offset higher pay for workers.