Federal Reserve announces interest rate hike
The Federal Reserve announced it is raising interest rates on Wednesday — a move to combat soaring inflation as the U.S. comes out of the pandemic and economic uncertainty in the wake of Russia's invasion of Ukraine. The quarter-point hike comes as prices have risen at their fastest pace in 40 years.
In a statement following the Federal Open Market Committee's two-day meeting, officials said the as 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."
The move does not come as a surprise. Federal Reserve Chairman Jerome Powell said at a congressional hearing earlier this month that he supports raising the federal funds rate by 0.25%. Interest rates have been near 0% for about two years since the central bank cut rates as the coronavirus pandemic started in March 2020. This is the first time the central bank has hiked the rate since the end of 2018.
Prices have increased 7.9% over the past year — the fastest rate of inflation since 1982. Last month, prices were up 0.8% — an acceleration from January. Personal consumption expenditures, the preferred measure used by the Federal Reserve, showed prices, excluding often-volatile food and energy, up 5.2% from a year ago and 0.5% in January.
The Fed signaled on Wednesday that the interest rate hike is the first in a series this year. New projections show the median of the 16 officials expect the federal funds rate to rise to at least 1.875% by the end of the year.
"By raising interest rates, the Federal Reserve has begun the process of unwinding their pandemic-era stimulus measures in an effort to tame inflation," said Greg McBride, chief financial analyst for Bankrate.com. "This isn't a one-and-done but the start of a series of rate hikes for the remainder of this year and well into next."
Some economists have called for a more aggressive approach — with a .50% rate hike right out of the gate, but the Fed took a more conservative approach amid uncertainty over the invasion of Ukraine. As the Central Bank moves to rein in soaring prices, the United States and its allies have slapped sanctions on Russian banks, businesses and individuals and restricted trade over its invasion.
"The timing couldn't be worse for the Federal Reserve, which is already chasing inflation for the first time since the 1980s," said Grant Thornton chief economist Diane Swonk. "The disruptions we are seeing are adding fuel to a well kindled inflation fire that goes well beyond the energy sector and could touch much more of our daily lives."
Meanwhile, the Fed has also revised down its projections for real GDP this year to 2.8% from 4% in December. They have also revised the PCE inflation projection upward to 4.3% with core PCE inflation at 4.1%.
As the Federal Reserve raises the federal interest rate, borrowing costs are going to go up for consumers. For credit card holders, a first increase of 0.25% may be inconsequential but multiple rate hikes over the next year or so could add up.
"It's that cumulative effect that should prompt you to take action now," said McBride. "Look to grab a 0% or other low rate balance transfer offer that can insulate you from the rate hikes we expect to see."
Mortgage rates have already been going up over the past few months in anticipation of higher rates and due to inflation. Auto loan rates are also expected to rise.
Should the Fed be more aggressive with raising interest rates, coupled with tightening spending power from higher costs for goods such as food and gas, economists have warned the chances of a recession next year have gone up.
But speaking Friday ahead of the Fed meeting, Treasury Secretary Janet Yellen, who previously chaired the Federal Reserve, said the economy is strong and households in general are in good financial shape. She noted record job creation and declines in unemployment. Last month, the unemployment rate hit 3.8%.
"One reason one might worry about a recession is that you think that monetary policy in bringing down inflation can cause that. We have seen that on some occasions in the past, but we've also seen episodes in which there is a soft landing," said Yellen. "I have confidence in the Fed to get inflation under control without causing a recession."
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