The Federal Reserve raised interest rates by a quarter percentage point on Wednesday, and signaled far more rate hikes, a total of seven for this year, marking a big first step in the Fed’s precarious fight to rein in the highest inflation in 40 years.
Fed leaders also acknowledged that inflation will remain high through the end of the year, hitting 4.3 percent, using the Fed’s preferred gauge, according to a new round of projections released Wednesday at the end of the Fed’s two-day policy meeting. The new estimates for seven hikes is more than double the number penciled in when policymakers last released projections in December.
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. 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,” Fed officials said in a statement released Wednesday.
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The Fed is under tremendous pressure to cool down the economy without moving too aggressively and triggering a recession. Yet, months of careful planning have been upended in just a few weeks, with war in Ukraine and new lockdowns in China’s manufacturing hubs poised to send ripples through the U.S. economy and push inflation even higher.
One Fed official — St. Louis Fed President Jim Bullard — wanted the Fed to act more aggressively and voted against the modest increase. In February, Bullard publicly called for the Fed to increase rates by 0.50 percentage point for its first hike in order to make more headway on bringing prices down by the summer.
The Fed also said it would start scaling back its enormous $9 trillion balance sheet at a coming meeting, but did not offer specifics.
Ask our economics reporters your questions about gas prices and the economy
Raising interest rates has a cooling effect on the economy, because it increases the costs associated with a wide range of lending, from mortgages to auto loans, as well as the kinds of investments businesses make to grow.
Wednesday’s rate increase is widely considered a modest move, and Republican critics have maintained the Fed’s move on Wednesday is too little too late. Former Obama Treasury Secretary Larry Summers warned today’s rate hike promised a path to stagflation and recession, in a column in The Post on Tuesday.
“I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely,” wrote Summers, who is credited with accurately forecasting soaring inflation as a problem for the economy a year ago.
With war in Ukraine, Fed’s game plan for rate hikes faces new challenges
Federal Reserve Chair Jerome H. Powell will speak more about the Fed’s moves during a news conference at 2:30 p.m. Eastern time.
Any forecasts of future interest-rate increases come with enormous caveats that depend on Russia’s invasion of Ukraine, covid surges in China and elsewhere, as well as America’s own economic recovery in the months to come.
Testifying before lawmakers earlier this month, Powell said that as Russia’s war escalates in Ukraine, “the implications for the U.S. economy are highly uncertain," and underscored the need to respond to data in real time.
Inflation explained: How prices took off
Goldman Sachs analysts have forecast that the economic fallout of Russia’s war will pull back on economic growth and raise the risk of the United States entering a recession. Gas prices have climbed to record highs, with fears that Russia’s invasion will continue to strain global energy markets and nudge prices up.
“We will proceed, but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” Powell told lawmakers.
At a congressional hearing, Powell left the door open for the Fed to move more aggressively if inflation doesn’t fall as interest rates rise, supply chains heal and congressional aid from last year fades away. But the Fed’s track record on predicting and managing inflation has come under a blistering review.
For much of the past year, Fed officials said inflation would be a temporary feature of the recovery, and limited to parts of the economy hit hardest by the pandemic. But over time, as higher costs spread to rent, groceries and everything in between, that message bore little resemblance to what was actually unfolding in the economy and in people’s daily lives.
“We’ve had this expectation, as you all know, for more than a year, and it hasn’t actually come true, so we’re humble about the fact that we can’t call with any confidence the turn,” Powell said to lawmakers two weeks ago.
Fed leaders also acknowledged that inflation will remain high through the end of the year, hitting 4.3 percent, using the Fed’s preferred gauge, according to a new round of projections released Wednesday at the end of the Fed’s two-day policy meeting. The new estimates for seven hikes is more than double the number penciled in when policymakers last released projections in December.
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. 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,” Fed officials said in a statement released Wednesday.
ADVERTISING
The Fed is under tremendous pressure to cool down the economy without moving too aggressively and triggering a recession. Yet, months of careful planning have been upended in just a few weeks, with war in Ukraine and new lockdowns in China’s manufacturing hubs poised to send ripples through the U.S. economy and push inflation even higher.
One Fed official — St. Louis Fed President Jim Bullard — wanted the Fed to act more aggressively and voted against the modest increase. In February, Bullard publicly called for the Fed to increase rates by 0.50 percentage point for its first hike in order to make more headway on bringing prices down by the summer.
The Fed also said it would start scaling back its enormous $9 trillion balance sheet at a coming meeting, but did not offer specifics.
Ask our economics reporters your questions about gas prices and the economy
Raising interest rates has a cooling effect on the economy, because it increases the costs associated with a wide range of lending, from mortgages to auto loans, as well as the kinds of investments businesses make to grow.
Wednesday’s rate increase is widely considered a modest move, and Republican critics have maintained the Fed’s move on Wednesday is too little too late. Former Obama Treasury Secretary Larry Summers warned today’s rate hike promised a path to stagflation and recession, in a column in The Post on Tuesday.
“I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely,” wrote Summers, who is credited with accurately forecasting soaring inflation as a problem for the economy a year ago.
With war in Ukraine, Fed’s game plan for rate hikes faces new challenges
Federal Reserve Chair Jerome H. Powell will speak more about the Fed’s moves during a news conference at 2:30 p.m. Eastern time.
Any forecasts of future interest-rate increases come with enormous caveats that depend on Russia’s invasion of Ukraine, covid surges in China and elsewhere, as well as America’s own economic recovery in the months to come.
Testifying before lawmakers earlier this month, Powell said that as Russia’s war escalates in Ukraine, “the implications for the U.S. economy are highly uncertain," and underscored the need to respond to data in real time.
Inflation explained: How prices took off
Goldman Sachs analysts have forecast that the economic fallout of Russia’s war will pull back on economic growth and raise the risk of the United States entering a recession. Gas prices have climbed to record highs, with fears that Russia’s invasion will continue to strain global energy markets and nudge prices up.
“We will proceed, but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” Powell told lawmakers.
At a congressional hearing, Powell left the door open for the Fed to move more aggressively if inflation doesn’t fall as interest rates rise, supply chains heal and congressional aid from last year fades away. But the Fed’s track record on predicting and managing inflation has come under a blistering review.
For much of the past year, Fed officials said inflation would be a temporary feature of the recovery, and limited to parts of the economy hit hardest by the pandemic. But over time, as higher costs spread to rent, groceries and everything in between, that message bore little resemblance to what was actually unfolding in the economy and in people’s daily lives.
“We’ve had this expectation, as you all know, for more than a year, and it hasn’t actually come true, so we’re humble about the fact that we can’t call with any confidence the turn,” Powell said to lawmakers two weeks ago.
