WASHINGTON: The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point and laid out an aggressive plan to push borrowing costs to restrictive levels by next year as concerns about high inflation and the war in Ukraine overtook the risks of the coronavirus pandemic.
The U.S. central bank, in a surprise move, projected the equivalent of quarter-percentage-point rate increases at each of its six remaining policy meetings this year, which would push its benchmark overnight interest rate to a range between 1.75% to 2.00% by the end of 2022. It is projected to further rise to 2.80% by the end of next year, above the 2.40% level officials now feel would slow the economy.
Fed Chair Jerome Powell, speaking after the end of the latest two-day policy meeting, said the economy is strong and that officials will raise rates more aggressively at future meetings if needed to control inflation.
“The way we’re thinking about this is that every meeting is a live meeting,” Powell said in a news conference. “We’re going to be looking at evolving conditions, and if we do conclude that it would be appropriate to move more quickly to remove accommodation, then we’ll do so.”
Powell said the U.S. economy is strong and should “flourish” even in an environment where borrowing costs are rising and stimulus is being removed. “It’s clearly time to raise interest rates and begin the balance sheet shrinkage,” he said.
An economic slowdown, however, may already be underway. Fed policymakers marked down their gross domestic product growth estimate for 2022 to 2.8%, from the 4% projected in December, as they began to discount the new risks facing the global economy.
“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 Fed said in its policy statement.
The statement, which dropped the now longstanding direct reference to the coronavirus as the most direct economic risk facing the country, marked the end of the Fed’s full-on battle against the pandemic, as it raised the federal funds rate and pledged “ongoing increases” to curb the highest inflation rates in 40 years.
The interest rate path shown in new projections by policymakers is tougher than expected, reflecting Fed concern about inflation that has moved faster and threatened to become more persistent than expected, and put at risk the central bank’s hope for an easy shift out of the emergency policies put in place to fight the fallout from the pandemic.
Major U.S. stock indexes briefly pared gains after the release of the statement and projections before recovering, with the S&P 500 index last up about 1.1% on the day.