March 16,
2022
Updated
March 17,
2022, 12:22 a.m. ET3 hours ago
3 hours ago
https://www.nytimes.com/live/2022/03/16/business/fed-meeting-interest-rates
Fed raises rates and projects six more increases
in 2022.
The Federal Reserve lifted its policy interest rate
for the first time since 2018 and penciled in six more rate increases this year
as it tries to combat a burst of quick price increases.
The Federal
Reserve lifted its key interest rate by a quarter of a percentage point on
Wednesday as policymakers took their first decisive step toward trying to tame
rapid inflation by raising borrowing costs.
Fed
officials have kept interest rates near zero since March 2020, when the pandemic
began to shake the U.S. economy, and this week’s decision was their first rate
increase since 2018. Policymakers projected six more similarly sized moves over
the course of 2022 as inflation has reached a 40-year high, signaling that they
are prepared to pull back support for the economy markedly.
“The
economy no longer needs — or wants — this very highly accommodative stance,”
Jerome H. Powell, the Fed chair, said during his post-meeting news conference.
The central
bank’s assault on rapid price increases will force it to strike a delicate
balance as policymakers try to slow the economy just enough to temper demand
and allow price pressures to moderate without going so far that they plunge the
United States into recession.
Mr. Powell
said that, in his view, “the probability of a recession within the next year is
not particularly elevated,” and that “all signs are that this is a strong
economy and, indeed, one that will be able to flourish” with less policy help.
“The
economy, we think, can handle interest rate increases,” he said.
In spite of
the forecast for higher rates, stocks rose 2.2 percent on Wednesday, a possible
signal that investors took heart in Mr. Powell’s insistence that the economy
was strong enough to withstand the bank’s efforts to slow inflation.
The Fed’s
decision to raise rates was an inflection point after two years of trying to
help the economy recover from the damage inflicted by the pandemic. While the
coronavirus continues to disrupt commerce around the world, the U.S. economy
has recovered swiftly. America’s job market has rebounded rapidly from steep
pandemic job losses, and businesses are now struggling to find workers.
A surge in
consumer spending has helped to push the rate of inflation to levels not seen
since the 1980s. Instead of echoing the anemic slog back from the 2007-9
recession — one that kept millions of applicants out of work and left inflation
tepid despite years of rock-bottom rates — the pandemic bounce-back has been
vigorous.
Judging by
inflation, it may even have too much heat, which is why the Fed is trying to
cool it to a more sustainable pace.
“We’ve had
price stability for a very long time, and maybe come to take it for granted —
but now we see the pain,” Mr. Powell said. “We’re strongly committed, as a
committee, to not allowing this higher inflation to become entrenched, and to
use our tools to bring inflation back down to more normal levels.”
Central
bankers have plotted a more aggressive plan for controlling inflation than in
December, when they last released economic projections. Officials now expect to
raise rates to 2.8 percent by the end of 2023, based on the median estimate, up
from 1.6 percent in their previous projections. That is high enough that, by
the Fed’s own estimates, it might amount to actually tapping the brakes on the
economy — not just taking a foot off the gas pedal.
“They knew
their policy didn’t match the economic backdrop, and this is catch-up,” said
Priya Misra, the head of global rates strategy at TD Securities.
Higher
interest rates will trickle out through the markets to make mortgages, car
loans and borrowing by businesses more expensive. That is expected to slow
consumption and investment, reducing demand in the economy and — Fed officials
hope — eventually weighing down surging prices.
Given the
path ahead for interest rate increases and the way they filter through the
economy, some economists said the central bank’s forecasts for strong growth
and a very low unemployment rate this year and next might be optimistic.
“It’s a bit
of a magical, immaculate disinflation,” said Michael Feroli, chief U.S.
economist at J.P. Morgan. “Even if they’re not saying it or showing it in their
forecasts, at some point you do need to slow the economy.”
Mr. Powell
noted on Wednesday that inflation was “well above” the Fed’s target and that
supply chain disruptions had been larger and longer lasting than officials
expected. Now price increases are broadening to rent and other services, and high
gas prices could keep costs elevated, he noted.
The Fed’s
quarterly economic projections, released alongside the rate decision, showed
that officials expected inflation to be 4.3 percent by the end of 2022. While
that is less than the 6.1 percent increase in the 12 months through January, it
is more than double the Fed’s goal of 2 percent.
The Fed
aims for maximum employment in addition to price stability, and many signs
suggest it is achieving that goal. Unemployment has dropped sharply, job
openings are plentiful, and there are too few workers to go around. A booming
job market has helped to push wage growth higher as employers compete for
workers and try to retain employees by paying more.
But that,
too, could risk fueling inflation. Higher pay gives workers more to spend, and
it leaves companies trying to cover climbing labor costs. From a price
stability standpoint, Mr. Powell said, recent wage growth has not been
sustainable.
There is a
“misalignment of demand and supply, particularly in the labor market, and that
is leading to wages moving up in ways that are not consistent with 2 percent
inflation over time,” he said.
As signs of
bubbling price pressures abound, some Fed officials have become nervous. James
Bullard, the president of the Federal Reserve Bank of St. Louis, voted against
the committee’s decision because he favored a larger interest rate increase of
half a percentage point.
Mr. Bullard
and some other Fed officials have argued that moving rates up more quickly at
first would show that the central bank was prepared to beat back rapid price
increases.
But Mr.
Powell made clear on Wednesday that, even if it is raising rates steadily
instead of adjusting them briskly at first, the Fed’s policy committee knows it
needs to act to restore price stability.
“We’re not
going to let high inflation become entrenched,” Mr. Powell said.
The Fed is
changing policy at a fragile moment. Russia’s invasion of Ukraine has raised
obstacles to steady economic growth around the world, even as it has sent oil
and gas prices higher and threatened to perpetuate tangled supply chains and
high inflation.
“The
implications for the U.S. economy are highly uncertain,” the Federal Open
Market Committee said in its statement Wednesday. “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 central
bank does not want to stoke uncertainty at a geopolitically fraught moment, and
Mr. Powell went out of his way to lay out its plans clearly. While he did not
commit to a quarter-point rate increase at each meeting, he noted that many
officials expect the same number of rate moves as there are meetings left in
2022, including this week's — a total of seven.
Markets are
also carefully watching to see when the Fed will begin to shrink its nearly $9
trillion balance sheet of bond holdings, a policy move that could push up
longer-term interest rates. Mr. Powell made clear that a plan could come as
soon as the Fed’s May meeting and that it will look much like the one the bank
used when it shrank its balance sheet from 2017 to 2019, albeit sooner and
faster.
As the Fed
acts to control inflation, the impact is likely to be palpable. Mortgage rates
have already climbed as the central bank has signaled its coming policy
changes.
Steeper
borrowing costs are likely to weigh on hiring, to slow wage growth and to keep
asset prices — including those for stocks and homes — from rising as much as
they draw buyers and investors away.
Jerome H.
Powell, the Federal Reserve chair, announced that the central bank would raise
interest rates by a quarter of a percentage point in an attempt to tame rapid
inflation.CreditCredit...T.J. Kirkpatrick for The New York Times
A recession
is a possibility any time the Fed raises interest rates, but allowing inflation
to rise unchecked could also be a risk. Already, retail sales data on Wednesday
offered an early hint that higher prices may be making it harder for some
consumers to afford things. Households are sitting on big savings amassed
during the pandemic, which could help them to sustain spending in the months
ahead, but rapid price increases could eventually eat into those stockpiles.
“High
inflation takes a toll on everyone, but really, especially, on people who use
most of their income to buy essentials like food, housing, and transportation,”
Mr. Powell said.
Economists
have said a repeat of the painful early 1980s, when the Fed caused a deep
recession as it battled inflation, is unlikely. But many have warned that a
gentle, easy end to the current inflationary burst is not assured.
“It is way
too soon to say it’s a pipe dream; it’s been a crazy year,” Jason Furman, an
economist at Harvard University, said earlier this week of the possibility of a
soft landing. “It feels, with every passing month, increasingly
unlikely.”
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