The Fed Acts on Inflation
The liftoff is here. Three months after first outlining their plan to combat runaway inflation, members of the Federal Reserve’s Open Market Committee (FOMC) voted 8-1 during their monthly policy meeting on Wednesday to raise the central bank’s target interest rate for the first time since 2018. The lone dissenter—St. Louis Fed President James Bullard—wanted to hike rates by more than the quarter-percentage point the rest of the committee settled on.
“As I looked around the table at today’s meeting, I saw a committee that’s acutely aware of the need to return the economy to price stability,” Federal Reserve Chair Jerome Powell told reporters in his post-meeting press conference. “[We’re] determined to use our tools to do exactly that.”
The quarter-percentage point increase—which puts the target federal funds rate between 0.25 percent to 0.5 percent—is just one component of the Fed’s efforts to tame the hottest inflation this country’s seen in 40 years. The central bank’s tapering off of monthly asset purchases wrapped up in early March, and Powell said Wednesday the body will begin reducing the size of its balance sheet—which has ballooned from about $4.1 trillion to $8.9 trillion over the course of the pandemic—at a coming meeting. Perhaps most importantly, the FOMC sees this week’s interest rate hike as the first of many, with most members penciling in six additional 0.25-percentage point increases before the year is out.
The projections—which are non-binding but generally indicative of the Fed’s thinking—represent a marked shift in outlook from just three months ago, when the same group foresaw just three interest bumps in 2022. Back in September, most central bankers envisioned personal consumption expenditures (PCE) inflation to return to about 2.2 percent this year (it’s currently over 6 percent), and expected they would keep interest rates near zero until 2023. This week, FOMC members raised 2022 inflation expectations to 4.3 percent, dropped their GDP growth projections for the year from 4 percent to 2.8 percent, and held unemployment rate predictions steady at 3.5 percent.
Still, Powell batted away questions on Wednesday as to whether the Fed has been behind the curve on inflation. “We have the tools that we need, and we’re going to use them,” he said. “We have a plan over the course of this year to raise interest rates steadily and also to run off the balance sheet. We’ll take the necessary steps to ensure that high inflation does not become entrenched, while also supporting a strong labor market.”
