Federal Reserve approves first interest rate hike in more than three years, sees six more ahead

The Federal Reserve raised its interest rate on Wednesday for the first time in more than three years to fight inflation.

The Federal Open Market Committee decided to raise the benchmark interest rate by a quarter percentage point after keeping it near zero since the beginning of the Covid epidemic.

The rate will now be in a range of 0.25-0.5%. The move will correspond with a hike in the prime rate and will cause financing costs for many forms of consumer borrowing and credit to go up. The rate increases will come with slower economic growth.

Along with the rate hikes, the committee also penciled in increases at each of the six remaining meetings this year, pointing to a consensus funds rate of 1.9% by the end of the year. The percentage point is higher than it was in December. There will be no hikes in the following year.

The rate rise was approved. The president of the St. Louis Fed wanted a 50 basis point increase.

The committee had to backtrack and begin cutting after raising rates in December.

The Fed's nearly $9 trillion balance sheet, made up mainly of Treasurys and mortgage, was addressed in the post-meeting statement.

At his news conference after the meeting, Powell said that the balance sheet reduction could be the equivalent of another rate hike this year.

Projections showed eight members expecting more than the seven hikes, while 10 thought there would be seven total in 2022.

Powell said at the news conference that the committee was attentive to the risks of inflation and inflation expectations. The U.S. economy is well-equipped to handle tighter monetary policy.

Officials adjusted their economic outlook on multiple fronts, seeing much higher inflation than they expected in December and slower GDP growth.

The personal consumption expenditures price index excludes food and energy is expected to reflect 4.1% growth this year, compared with the 2.5% projection in December. In the next two years, the core PCE is expected to be 2.5% and 2.7%.

The statement said that inflation remains elevated, reflecting supply and demand imbalances related to the Pandemic.

The committee noted the potential implications of the Ukraine war and slashed December's GDP by 4%. The years were the same. The unemployment rate is expected to end this year at 3.5%.

The statement said that the invasion of Ukraine by Russia is causing tremendous human and economic hardship.

The stock market initially reacted negatively to the announcement. The benchmark 10-year Treasury note rose to 2.22% before retreating.

Jim Baird, chief investment officer at Plante Moran Financial Advisors said that the Fed has a path forward to continue to tighten in response to this overwhelming concern around inflation.

The central bank slashed its federal funds rate in the early days of the Pandemic to combat a shutdown that crippled the U.S. economy and financial markets while sending 22 million Americans to the unemployment line.

Widespread factors have combined to force the Fed's hand on inflation, a condition that policymakers last year dismissed as "transitory". The main question for investors is how many rate hikes will they see and how quickly they will happen.

The current trend of price increases, at their fastest 12-month pace in 40 years, has been fed by demand that has far outpaced supply chains that are less than their peak. More than $10 trillion worth of fiscal and monetaryStimulus has been associated with the inflation surge. The spike in oil prices has abated in recent days, but they have been linked to the war in Ukraine.

The markets had been pricing in about seven 0.25 hikes this year, according to the data. Some officials have indicated that the Fed could raise its rate by 50 basis points in May if inflation continues.

The consumer price index shows that prices are up 7.9% over the past year. The biggest burden has been the rise in gasoline prices.

From gas and groceries, price pressures have expanded.

After falling in the early days of the Pandemic, clothing prices have risen over the past year. Motor vehicle repair costs have gone up while airline fares have gone up. Rent of shelter costs, which make up nearly one-third of the consumer price index, have been moving up in recent months and are up 4.8% year over year.

The Fed's 2% inflation target has been left in the dust by all of those cost increases.

In September 2020 the Fed approved a new approach to inflation that would allow it to run hotter in the interest of an inclusive employment goal that spans across race, gender and wealth. The US economy had seen inflation that peaked in the early 1980s at nearly 15%, but the change in approach was followed almost immediately by more inflation.

The Paul Volcker-led Fed had to jack up interest rates to a point where they tipped the economy into recession, something central bankers now want to avoid. The funds rate was over 20% back then.

The Fed will need to live up to its promise if it is to continue to soothe market fears about runaway inflation.

Will the path that they have laid out be enough to bring inflation back down to more comfortable levels? He said that they could get more aggressive.