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Fed Chairman Jerome Powell. Photo: Jonathan Ernst / Reuters / Bloomberg – |
The Federal Reserve has approved the first rate hike in more than three years as a way to tackle galloping inflation without dampening economic growth, CNBC reports.
After keeping its benchmark anchored close to zero since the pandemic began, the Federal Open Market Commission said it would raise it by a quarter of a percentage point, or 25 basis points, and will now be in the 0.25% -0.5 range. %. The Commission expects the key interest rate to reach between 1.75% and 2% by the end of the year.
By the end of next year, the interest rate is expected to be at the level of 2.80%, above the level of 2.40%, which now leaders believe will slow down the economy.
Along with the current increase in interest rates, the commission envisions increases in each of its remaining six meetings this year. She expects three more increases in 2023 and none in 2024.
The increase in interest rates was approved with only one vote against. The chairman of the Federal Reserve in St. Louis, James Bullard, wanted an increase of 50 basis points.
The last time the commission raised interest rates was in December 2018, after which it began lowering them.
The Federal Open Market Commission also announced that it expects to start reducing its holdings of government securities and mortgage-backed securities at one of its next meetings. Currently, these Fed holdings amount to nearly $ 9 trillion. dollars.
Federal Reserve Chairman Jerome Powell hinted at a press conference after the meeting that the balance cut could begin in May, adding that the process would likely amount to another rate hike this year.
“We are wary of the risks of additional pressure to accelerate inflation and inflation expectations,” Powell said. “The Commission is determined to take the necessary measures to restore price stability. The US economy is very strong and in a good position to deal with tighter monetary policy,” he added.
The leaders of the US Federal Reserve have also adjusted their forecasts for the economy on many fronts. They forecast much higher-than-expected inflation in December and significantly slower GDP growth.
The members of the commission raised their expectations for inflation, predicting that the price index of personal consumer spending, excluding food and energy, will increase by 4.1% this year compared to forecasts of 2.7% in December 2021.
With regard to GDP growth, expectations for 4% were reduced to 2.8% in December, with the commission noting in particular the potential consequences of the war in Ukraine.
The Fed expects unemployment to fall to 3.5% this year and stay around that level next year, but predicts an increase to 3.6% in 2024.
“Russia’s invasion of Ukraine is causing great human and economic difficulties. The consequences for the US economy are very uncertain, but in the short term, the invasion and related events are likely to put additional pressure on rising inflation and weigh on economic activity, the committee said in a statement.
Change of course
The central bank cut federal interest rates at the start of the pandemic to fight the blockades that affected the US economy and financial markets, while sending 22 million Americans to the queues with the unemployed.
But a number of factors have come together to force the Fed to take action against inflation, a phenomenon that executives considered “transient” last year. Over the past two months, central bank officials have made it clear that interest rate hikes are imminent, with the main question for investors being how much the increases will be and how quickly they will be taken.
The current trend is rising prices, which are rising at their fastest 12-month pace in 40 years, fueled by demand that is far ahead of supply chains. They remain blocked, though not so much compared to their peak during the pandemic. Unprecedented levels of fiscal and monetary incentives worth more than 10 trillion. dollars coincide with the acceleration of inflation. And the war in Ukraine coincides with a sharp rise in the price of oil, although in recent days it has calmed down.
On Wall Street, the broad S&P 500 has slowed since the release of the Fed’s communiqué and forecasts, rising about 0.8 percent. Yields on 10-year government securities rose to 2.212%, the highest level since May 2019, and that on 2-year bonds rose to 1.9890%, the highest level since June 2019. The dollar index made transition to a slight increase after a slight decline before.
*The information has been supplemented.
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