The Fed raises interest rates for the first time in three years and signal aggressive action to fight soaring inflation
The US Federal Reserve, as widely expected, raised interest rates by 0.25% in their policy meeting in March, and announced an aggressive plan to keep increasing borrowing cost through this and next year.
The US policymakers aim to boost economic recovery from coronavirus pandemic and tackle soaring inflation, which reached the highest since 1982 and poses a strong risk to the economy, together with the war in Ukraine.
The central bank’s Federal Open Market Committee, started to tighten monetary policy for the first time since 2018, after the interest rates were brought to zero at the start of pandemic, in attempts to help the economy, slowed by a massive lockdowns.
While the decision was widely expected, although there were a significant bets for more aggressive approach and 0.5% hike, markets focused on announcements about the Fed’s following steps and the pace of raising interest rates in coming months.
Fed’s projections showed hawkishness above expectations, with projections signaling policymakers’ readiness to increase pace in fighting inflation as the most of FOMC members see the federal funds rate rising to a range between 1.75% to 2% by the end of this year, which suggests a steady 0.25% increases in the Fed’s six remaining policy meetings this year and expect rates to rise to 2.8% in 2023.
The Fed Chair Jerome Powell, said at the press conference at the end of two-day policy meeting that the economy is strong enough to withstand the rate hikes and maintain current strong wage growth and hiring as the US labor sector is heading towards the full employment after pandemic crisis.
At the same time, the Fed is focusing in limiting the impact of rising prices on American households, as inflation is expected to remain above Fed’s 2% target through 2024, despite the central bank’s latest action.
The Fed expect rate increases to slow inflation by reducing demand for the bigger projects, such as buying houses or automobiles, which became more expensive, however this may slow economic growth, as the economy may already be slowing for other reasons that caused the Fed to mark down its GDP growth estimates to 2.8% in 2022 from the previous projections for 4% growth, made in December.
Lowered growth projections point to the effects of the war in Ukraine, which could hit the US economy through a number of channels and result in higher commodity and oil prices that would directly weigh on the economic growth.
Despite all factors which add the pressure on the US economy, the Fed put the price stability as its priority, although facing a tough work in coming months, in attempts to avoid an economic crash in landing the economy from inflation heights.