U.S Fed Hikes Interest Rates 0.25%
Jerome Powell, Federal Reserve Chairman

U.S Fed Hikes Interest Rates 0.25%

The United States (U.S) Federal Reserve (Fed) on Wednesday raised its benchmark lending rate for the first time since 2018, citing continued inflation pressures and saying the economic outlook remains “highly uncertain” amid the ongoing war between Russia and Ukraine.

The central bank raised the federal funds rate to a range of 0.25% to 0.5% from its prior range of zero to 0.25%, in line with Wall Street estimates.

The Fed also indicated that the rate increase would mark the start of a series of hikes. The benchmark rate bank has been anchored near zero since the start of the COVID-19 pandemic.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the bank’s Federal Open Market Committee said in a statement after its two-day meeting.

The Fed said Russia’s invasion of Ukraine and related events are expected to create “additional upward pressure on inflation and weigh on economic activity” in the near term.

On a positive note, the bank said economic activity and employment indicators have continued to gain strength, jobs gains have been sold in recent months, and the unemployment rate has fallen notably.

The committee said it expects to start cutting its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.

“The committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” the FOMC said. READ: Fitch Sees Two Fed Rate Hikes in 2022, Four in 2023

“With appropriate firming in the stance of monetary policy, the committee expects inflation to return to its 2 percent objective and the labour market to remain strong,” it added.

Separately, the committee also projected rate increases at each of the six remaining meetings this year, pointing to a consensus funds rate of 1.9% by the end of this year. It sees three more increases in 2023 and then none the following year.

Committee members also raised their inflation estimates, expecting the personal consumption expenditures price index excluding food and energy to reflect 4.1% growth in 2022, compared to December’s 2.7% projection.

Core PCE is expected to be 2.6% and 2.3%, respectively, in the next two years before settling to 2% over the longer term.

The committee also lowered its real gross domestic product growth projection to 2.8% from December’s 4%, and it continues to expect the unemployment rate to end this year at 3.5%.

In a statement posted on its website, Fed said, “Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

“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.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labour market to remain strong.

“In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate.

“In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook.

“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.

“The Committee’s assessments will take into account a wide range of information, including readings on public health, labour market conditions, inflation pressures and inflation expectations, and financial and international developments”.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice-Chair; Michelle W. Bowman; Lael Brainard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller.

Voting against this action was James Bullard, who preferred at this meeting to raise the target range for the federal funds rate by 0.5 percentage points to 1/2 to 3/4 percent. Patrick Harker was voted as an alternate member at this meeting.

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