The Federal Reserve said Wednesday it would raise its benchmark interest rate by a a quarter percentage point and laid out plans for “ongoing increases in its policy rate.”
With inflation running at 40-year highs, the Fed is now planning to move steadily away from its two-year old stimulative policy stance that cushioned the economy during the pandemic. The Fed now sees its policy rate hitting 1.9% by the end of this year.
Fed Chairman Jerome Powell had telegraphed the rate increase earlier this month. There was one dissent, with St. Louis Fed President James Bullard argued for a 50 basis point rate hike.
The commodity price shocks and uncertainty as a result of Russia’s invasion of Ukraine is adding to uncertainty about the outlook, the Fed said. In the short term, it will boost inflation and dampen economic growth, the Fed said.
The Fed’s decision will raise its policy rate from near zero to between 0.25% and 0.5%. It is the first hike since 2018.
The Fed did not give details of how it will shrink its balance sheet, as some economists had expected. The central bank said only it plans to begin the process “at a coming meeting.”
Financial markets expect the Fed to raise its policy rate by six quarter-point moves this year.
New projections show officials expect the fed funds rate to hit 1.9% by the end of 2022, according to projections of 16 officials and to 2.8% by the end of 2023 and holding steady at that rate through 2024.
The pace the Fed forecast is much faster than what they laid out in December. It brings the Fed policy rate into “restrictive” territory that will weigh on economic growth.
Inflation has been much stronger than the Fed expected. The central bank raised its core inflation forecast in 2022 to 4.1% from 2.7% forecast in December.
The yield on the 10-year Treasury note
moved higher after the announcement.