By CHRISTOPHER RUGABER – AP business writer
WASHINGTON (AP) – The Federal Reserve on Wednesday embarked on a risky effort to tame the worst inflation since the early 1980s by raising its short-term interest rate and announcing up to six more rate hikes this year.
The Fed’s quarter-point hike in interest rates, which it had kept close to zero since the pandemic recession two years ago, marks the beginning of its efforts to curb the high inflation that followed the recession recovery. The rate hikes will ultimately mean higher borrowing rates for many consumers and businesses.
Central bank policymakers expect inflation to remain elevated, ending 2022 at 4.3%, according to updated quarterly forecasts they released on Wednesday. That’s well above the Fed’s target for the year of 2%. Officials are also now forecasting much slower economic growth this year of 2.8%, compared with a 4% estimate in December.
At a news conference on Wednesday, Chairman Jerome Powell said he believed the economy was resilient enough for the Fed to implement a series of rate hikes without causing a downturn.
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“Everything suggests this is a strong economy,” Powell said, “one that can thrive in the face of less accommodative monetary policy.”
The Fed’s forecast of numerous more rate hikes over the coming months disrupted a strong Wall Street rally, eroding equity gains and pushing bond yields higher. But most economists say significantly higher interest rates are long overdue to combat escalating inflation across the economy.
“With the unemployment rate below 4%, inflation nearing 8% and the war in Ukraine likely to put even more upward pressure on prices, that’s what the Fed needs to do to bring inflation under control,” he said Chief Economist Mike Fratantoni at the Mortgage Bankers Association.
In a statement issued after its last policy meeting, the Fed noted that Russia’s invasion of Ukraine and subsequent Western sanctions “are likely to create additional upward pressure on inflation and weigh on economic activity.”
Powell steers the Fed into a sharp reversal. Officials had kept interest rates extremely low to support growth and hiring during the recession and its aftermath. As recently as December, Fed officials were expecting only three rate hikes this year. Now, the projected seven hikes would take the short-term interest rate to between 1.75% and 2% by the end of 2022. He could hike rates by half a point at future meetings.
On Wednesday, officials also forecast four more rate hikes in 2023, which would take the policy rate to 2.8%. That would be the highest level since March 2008. It should raise borrowing costs for mortgages, credit cards and auto loans.
A member of the Fed’s rate-setting committee, James Bullard, head of the Federal Reserve Bank of St. Louis, disagreed with Wednesday’s decision. Bullard advocated a half-point rate hike, a position he has taken in interviews and speeches.
The Fed also said it will begin reducing its nearly $9 trillion balance sheet, which has more than doubled during the pandemic, “at an upcoming meeting.” This move will also result in the credit crunch for many consumers and businesses.
Powell hopes the rate hikes will achieve a difficult and narrow goal: raise the cost of borrowing enough to slow growth and tame high inflation, but not so much as to plunge the economy into recession.
However, many economists worry that the Fed may still be raising interest rates with inflation already so high – it hit 7.9% in February, the worst in four decades – and the Russian invasion of Ukraine pushing up gas prices higher than expected now and possibly pushing the economy into recession.
However, Jason Pride, an investment officer at Glenmede, said he believes Russia’s invasion could prompt the Fed to take a relatively slow approach.
“The war in Eastern Europe is unlikely to halt the Fed’s tightening plans, but it could prompt caution about the rate of rate hikes as the economic impact of the conflict is better understood,” Pride said.
According to its own statements, the central bank underestimated the breadth and persistence of high inflation after the outbreak of the pandemic. 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 facing the Fed have escalated. Russia’s invasion has pushed up the cost of oil, gas, wheat and other commodities. China has shut down ports and factories again to try to contain a fresh outbreak of COVID that will worsen supply chain disruptions and likely add further pressure on fuel prices.
Meanwhile, the sharp rise in average gas prices since the invasion of more than 60 cents to $4.31 a gallon nationwide will push up inflation and also likely slow growth — two contradictory trends notorious for the Fed are difficult to deal with at the same time.
The steady expansion of the economy offers a certain cushion against higher prices and more expensive petrol. Consumers are spending at a healthy pace and employers continue to recruit quickly. There are still a record 11.3 million job vacancies, far more than the number of unemployed.
AP business writer Paul Wiseman contributed to this report.
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