The move marks the end of the Fed’s policy. the policy of easy money in the era of the pandemic and is taking place against the backdrop of skyrocketing inflation in America. The federal funds rate is now 0.25-0.5%.
“We believe the economy is very strong and will be able to withstand tighter monetary policy,” Fed Chairman Jerome Powell told reporters at a press conference after Wednesday’s meeting.
That The central bank reported well the quarter percentage point increase, and Powell has hinted at it repeatedly over the past few months. Earlier this month, he told lawmakers he favored a quarter-point rate hike. This is the first rate hike since December 2018 and the first time rates have changed. from their near-zero level since the bank cut them almost exactly two years ago, in March 2020, after the pandemic.
Prices have risen over the past year for most Americans, pushing inflation well above the Fed’s long-term 2% target and forcing it into action. The central bank has a dual mandate: to maintain stable prices and maximum employment.
But prices rose during the pandemic due to high demand, supply chain chaos and higher energy costs. Powell initially called pandemic inflation “temporary” before dropping the term during a congressional hearing last November.
All expectations for factors that could bring inflation down, such as lifting the supply chain impasse and increasing labor force participation, fell short, Powell said. So the Fed had to act.
In the year ended February, consumer prices rose 7.9%, while US manufacturers’ prices for their goods rose 10% over the same period. None of the figures are seasonally adjusted. Meanwhile, the US labor market recovery came quickly after the shock of the spring 2020 economic shutdown, which marked the largest job loss in history. As of February, the country was still short of 2.1 million jobs compared to the same month two years earlier.
Due to the strong labor market and high inflation, only half of the Fed’s mandate is being fulfilled.
What will the Fed do next?
Wednesday’s policy update also included a new set of central bank forecasts showing Fed officials expect a median federal funds rate of 1.9% by the end of this year before raising it to 2.8% in 2023. But the Fed could also raise rates faster if inflation doesn’t slow down. The central bank has six meetings left this year. The next one is scheduled for May 3-4.
Central banks have also revised their inflation forecasts to an average of 4.3% by the end of the year, from 2.6% forecast in December.
At the same time, U.S. economic growth has slowed to an average of 2.8% this year, compared with 4% expected in December.
According to Powell, the consequences of the Russian-Ukrainian conflict will hit the US economy and are already putting upward pressure on inflation.
“The implications for the US economy are highly uncertain, but in the near term, the invasion and related developments are likely to create additional upward pressure on inflation and dampen economic activity,” the Fed said in a statement on Wednesday.
But there are no reasons for concern yet.
“We think that this will hit the GDP to some extent; 2.8% is still very strong growth,” he said. “We believe the economy is very strong and will be able to sustain tighter monetary policy.”