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The U.S. Federal Reserve’s Open Market Committee voted 8 to 1 on 16 March to raise its key interest rate by a quarter-point.
Rates will now range from 0.25 to 0.50 percent.
The lone dissenter was James Bullard, president of the Federal Reserve Bank of St. Louis, who wanted rates hiked by a half-point.
“I recommended that the committee try to achieve [an interest] rate above 3 percent this year,” Bullard said in an 18 March statement. “This would quickly adjust the rate to a more appropriate level for the current circumstances.”
“In my view, raising the target range to 0.50 to 0.75 percent and implementing a plan for reducing the size of the Fed’s balance sheet would have been more appropriate actions,” he added.
The Fed also signaled at least six more rate increases this year and plans to end the year with a base rate at, or close to, 2 percent, slightly higher than in 2019.
The Fed raised rates nine times from 2015 through 2018.
The schedule of rate hikes now planned more closely matches the 17 increases the bank imposed from 2004 to 2006, a factor that some analysts say helped create the Great Recession in late 2007.
From 2012, after the Great Recession eased, the Fed held rates close to zero for seven years, letting rise to a peak of 2.44 percent in April 2019, then dropping it gradually to 1.55 percent before the COVID era, when the Fed’s policy committee plunged the rate to 0.25 percent.
At last week’s meeting, seven of the 18 committee members expressed the belief that interest rates will need to exceed 2 percent this year to have a significant impact on inflation.
That would require the Fed to raise rates by a half-point in at least one sitting, something the bank hasn’t done since 2000, or to raise rates between meetings.
Fed officials indicated they foresee no need to raise rates above 3 percent for the next several years.
As recently as December, the central bank was expecting to raise rates just three times in 2022.
“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 and determined to do exactly that,” Fed chair Jerome Powell said in his post-meeting press briefing.
Powell expressed concern that the U.S. job market, with rising wages and more than 10 million jobs unfilled, could drive inflation higher.
“That’s a very, very tight labor market, tight to an unhealthy level,” he said.
The Fed also may start shrinking its massive bond portfolio as early as May, Powell said.
After reaching 7.9 percent in February, U.S. inflation will fall back to 4.1 percent by the end of this year, 2.6 percent by 2023, and 2.3 percent in the following year, Fed officials predicted.
The Fed now projects the U.S. economy to expand by 2.8 percent this year, not the 4 percent it had foreseen in December. The estimates for growth in the following two years remain the same at 2.2 percent in 2023 and 2 percent in 2024.
Critics warned that the Fed’s timid rate hike will fail to tackle inflation, while others warned that a higher increase would have thrown the economy into a recession, especially while the Ukraine war is rattling commodities market.
Powell downplayed both concerns.
“In my view, the probability of a recession within the next year is not particularly elevated,” Powell said at his press briefing.
“All signs are that this is a strong economy, one that will be able to flourish—not to say withstand, but certainly flourish—in the face of less accommodative monetary policy.”
Not everyone is convinced.
The Fed’s planned series of small rate hikes “is likely to lead to stagflation” and “ultimately to a major recession” because inflation will remain high, leading to layoffs and a shrinking economy, former treasury secretary Lawrence Summers wrote in a 15 March Washington Post opinion essay.
The Fed “has not internalized the magnitude of its errors over the past year” in failing to act sooner to rein back inflation, he added.
“The economy could still end up in a recession next year, but at least the Fed positioned itself a little better to fend off inflation,” analyst Edward Moya at OANDA said in a 16 March comment quoted by Business Insider.
TREND FORECAST: Uncontrolled inflation was pushing the economy toward not only a recession, but also Dragflation, one of our Top 2022 Trends, in which the economy drags down while prices inflate.
The war in Ukraine and the Western sanctions that resulted have now multiplied the chance that the U.S. economy will enter a period of Dragflation before this year is over.