WASHINGTON (AP) — The Federal Reserve on Wednesday launched a high-risk effort to rein in the worst inflation since the 1970s, raising its benchmark short-term interest rate and potentially signaling as many as seven rate hikes this year.
The quarter-point hike in its key rate, which it had pinned near zero since the start of the pandemic recession two years ago, marks the start of its efforts to rein in the high inflation that followed the exit. of recession. Rate hikes will eventually mean higher lending rates for many consumers and businesses.
Central bank policymakers expect inflation to remain elevated and end 2022 at 4.3%, according to updated quarterly projections they released on Wednesday. That’s well above the Fed’s 2% annual target. Officials also now forecast much slower economic growth this year, at 2.8%, down from its estimate of 4% in December.
Chairman Jerome Powell is steering the Fed towards a sharp turn. Officials had kept rates extremely low to support growth and hiring during the recession and its aftermath. As recently as December, Fed officials expected to raise rates only three times this year. Now, its seven planned hikes would take its short-term rate to 1.875% at the end of 2022. It could raise rates by half a point in future meetings.
Fed officials are also planning four more hikes in 2023, taking its benchmark rate to 2.8%. This would be the highest level since March 2008. Borrowing costs for mortgages, credit cards and auto loans will likely rise accordingly.
Powell hopes the rate hikes will achieve a difficult and narrow goal: raise borrowing costs enough to slow growth and bring high inflation under control, but not so much as to tip the economy into recession.
Yet many economists worry that with inflation already so high – it hit 7.9% in February, the worst in four decades – and with Russia’s invasion of Ukraine pushing up oil prices. In essence, the Fed may have to raise rates even higher than it now expects and potentially tip the economy into recession.
By its own admission, the central bank underestimated the magnitude and persistence of high inflation after the pandemic hit. Many economists say the Fed has made its job riskier by waiting too long to start raising rates.
Since its last meeting in January, the challenges and uncertainties for the Fed have intensified. The Russian invasion amplified the cost of oil, gas, wheat and other raw materials. China has again closed ports and factories in an attempt to contain a new COVID outbreak, which will worsen supply chain disruptions and likely further pressure on fuel prices.
In the meantime, the sharp rise in average gasoline prices since the invasion, up more than 60 cents to $4.31 a gallon nationwide, will drive up inflation while likely slowing the growth – two contradictory trends that are notoriously difficult for the Fed to manage simultaneously.
The steady expansion of the economy offers some protection against higher tariffs and more expensive gas. Consumers are spending at a healthy pace and employers continue to hire rapidly. There are still a near record number of 11.3 million job vacancies, far exceeding the number of unemployed.
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