Fed hikes rate in bid to tame inflation, indicates more to follow

Fed hikes rate in bid to tame inflation, indicates more to follow

New York - The Federal Reserve launched a high-risk effort Wednesday to tame the worst inflation since the early 1980s, raising its benchmark short-term interest rate, the first since 2018, and signaling up to six additional rate hikes this year.

The Fed’s quarter-point hike in its key rate, which it had pinned near zero since the pandemic recession struck two years ago, marks the start of its effort to curb the high inflation that followed the recovery from the recession. The rate hikes will eventually mean higher loan rates for many consumers and businesses.

The central bank, in a policy statement, along with quarterly projections and remarks by Chair Jerome Powell at a news conference, pointed to a somewhat more aggressive approach to rate hikes than many analysts had expected.

Investors are working out how much monetary policy tightening the economy can handle as the U.S. Federal Reserve embarks on its rate-hike cycle, with some predicting an even steeper path ahead while others fuss over possible missteps.

The Fed also released a set of quarterly economic projections Wednesday that underscored the potential for extended interest rate increases in the months ahead. Seven hikes would raise its short-term rate to between 1.75% and 2% at the end of 2022. Fed officials also forecast four more rate increases in 2023, which would boost its benchmark rate to 2.8%.

Hiking rates should tame sky-high inflation, but it runs the risk of crimping growth and tipping the economy into recession.

The clarity on the Fed's projected rate hike path and the central bank's insistence that the economy is strong enough to handle a cocktail of policy tightening, higher inflation and volatile commodity prices in the wake of Russia's invasion of Ukraine, reassured some.

The benchmark S&P 500 closed up more than 2%, a move that some investors took as relief that the Fed has kicked off its inflation fight.

Many economists worry that with inflation already so high, it reached 7.9% in February, the worst in four decades. With Russia’s invasion of Ukraine driving up gas prices, the Fed may have to raise rates even higher than it now expects and potentially cause a recession.
-Reuters/AP

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