The US Federal Reserve on Tuesday raised interest rates by a quarter percentage point and signalled six more such increases this year, launching a campaign to tackle the fastest inflation in four decades even as risks to economic growth mount.
Policymakers led by Chairman Jerome Powell voted 8-1 to lift their key rate to a target range of 0.25 to 0.5 per cent, the first increase since 2018, after two years of holding borrowing costs near zero to cushion the economy from the pandemic.
St Louis Fed President James Bullard dissented in favour of a half-point increase, the first vote against a decision since September 2020.
The increase is likely to be the first of several to come this year, as the Fed said it “anticipates that ongoing increases in the target range will be appropriate".
Speaking at a news conference, Mr Powell said he believed the economy remains sturdy enough for the Fed to carry out a series of rate increases without causing a downturn.
“All signs are that this is a strong economy,” he said, “one that will be able to flourish in the face of less accommodative monetary policy.”
In the Fed’s so-called dot plot, officials’ median projection was for the benchmark rate to end 2022 at about 1.9 per cent — in line with traders’ bets but higher than previously expected — and then rise to about 2.8 per cent in 2023.
“We are attentive to the risks of further upward pressure on inflation and inflation expectations," Mr Powell added.
They estimated a 2.8 per cent rate in 2024, the final year of the forecasts, which are subject to even more uncertainty than usual given Russia’s invasion of Ukraine and new Covid-19 lockdowns in China are buffeting the global economy.
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” the Federal Open Market Committee said in a statement Wednesday following a two-day meeting in Washington, the first held in person — rather than via videoconference — since the pandemic began.
“The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upwards pressure on inflation and weigh on economic activity.”
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Various grades of petrol, with prices above $7 per gallon, are displayed at a Chevron gas station in downtown Los Angeles, California. AP -
Petrol prices are displayed at an Exxon gas station behind American flag in Edgewater, New Jersey. Reuters -
Drivers in Hawthorne, California wait in line to pump fuel as the price of regular petrol reaches above $5.89 a gallon and premium fuel tips over $6 per gallon. AFP -
'Any good news please' sign seen along with a price for a gallon of petrol at a service station in Denver, Colorado. AP -
Two people wearing masks stand in front of a sign showing the price of petrol outside of a service station in Washington. AFP -
A sign displays petrol prices as a vehicle departs a Shell station in Washington. AFP -
A person takes photographs of petrol prices at a Shell station in Los Angeles, California. AFP -
An attendant walks past a pump at a station selling petrol at almost $7 a gallon in Los Angeles, California. AP -
A driver holds a fuel nozzle at a Shell station in San Francisco, California. Bloomberg -
Two people wearing masks walk in front of a sign showing the price of petrol outside of a station as prices reach record highs in Washington. AFP -
An electrical contractor repairs a sign with petrol prices in Los Angeles, California. AFP -
Cars drive near a petrol station in Washington. AFP -
Petrol prices are advertised at almost $7 a gallon in Los Angeles, California. AP
The Fed said it would begin allowing its $8.9 trillion balance sheet to shrink at a “coming meeting” without elaborating. The purchases of Treasuries and mortgage-backed securities, which concluded this month, were intended to provide support to the economy during the Covid-19 crisis and shrinking the balance sheet accelerates the removal of that aid.
“I saw a committee that is acutely aware of the need to return the economy to price stability,” Mr Powell told reporters, characterising the mood around the the table as policymakers debated the outlook.
The Fed faces the arduous task of securing a soft landing for the world’s largest economy for the first time since the early 1990s. Tighten too slowly and it risks allowing inflation to run out of control, requiring even tougher action. Shift too quickly and the central bank could affect markets and tip the economy into recession.
Complicating the job, Russia’s invasion of Ukraine has sent the cost of fuel, food and metals racing even higher, raising fears of 1970s-style stagflation by posing threats to prices, growth and financial-market stability.
In new economic projections, Fed officials said they see inflation significantly higher than previously forecast, at 4.3 per cent this year, but still coming down to 2.3 per cent in 2024. The forecast for economic growth in 2022 was lowered to 2.8 per cent from 4 per cent, while unemployment projections were little changed.
