Fed raises rates for the first time since 2018, starts a new cycle in the US
fed increases rates first time since 2018
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The Fed raised interest rates for the first time since 2018 to stem the price spike. There are six more climbs coming this year. President Powell admits he can be more aggressive if fighting inflation demands it.

As was widely expected, the US Federal Reserve (Fed) raised benchmark interest rates by 25 basis points to stop rising prices in the country, and even the potential impact of the war in Ukraine on the economy did not stop the central bank from getting started. to a new cycle of monetary policy normalization in the world’s largest economy. Rates are expected to rise six more times this year to close to 2%. President Jerome Powell wanted to show a firm grip on his commitment to price stability, something he had “taken for granted” until now: “If we have to raise rates faster, that’s what we will.”

It is the Fed’s first rate hike since December 2018, in a decision that now places the reference rate between 0.25% and 0.50%.

On the other hand, it also represents the first of more increases that are expected in the near future to face an inflation rate that is at 40-year highs, close to 8%. By raising interest rates, the Fed increases the price of money, in particular by increasing loans to companies and families, putting a brake on economic activity in order to bring prices down.

The decision was consensual among almost all members, with the exception of the St. Louis, James Bullard, who wanted a 50 basis point rise.

Interest rises six more times this year

After yet another two-day meeting, the Fed’s Open Market Committee is now pointing to rate hikes at each of the six meetings still to come this year, which will push the Fed funds rate to the 1st. .9% by the end of the year. The committee anticipates three more hikes in 2023, when interest rates are expected to reach 2.3%, and zero hikes the following year.

The market was already expecting the central bank led by Jerome Powell to be more aggressive in raising rates now than in the previous cycle of hikes, when it raised rates eight times by a total of two percentage points between 2017 and 2018.

However, the pandemic brought interest rates back to close to zero in 2020 and they have continued there until now. Rates are set to take off again, even against a backdrop of war in Europe and serious economic implications due to rising energy and raw materials prices and sanctions imposed on Moscow.

“I no longer remembered what it was like to have such high inflation”

In a press conference, the Fed chairman said that the “time to start raising interest rates and reducing the balance sheet has arrived” and that “the economy is very strong” and the job market is going through a “tremendous moment”. “I saw a committee determined to use the tools to ensure the objective of price stability,” said Jerome Powell.

Powell left a clear message to the markets and especially to consumers regarding the commitment to combating inflation, with the central bank trying to regain credibility in this aspect: “If inflation shows the need to raise interest rates faster, that’s what we will do. ”, he assured, adding that the Fed will also reduce its balance sheet “to ensure that high inflation does not take root”.

He even said that he no longer “remembered what it was like to have such high inflation” and that he took price stability for granted.

“We are very committed to bringing inflation back to normal levels of 2%. I want people to understand that the way we do this is by raising interest rates and lowering the balance sheet, so financial conditions will slow the economy down. The good news is that the economy and the market are very strong and are holding up with interest rate hikes,” explained Powell.

“If inflation shows the need to raise interest rates faster, that’s what we will do.”

Jerome Powell
Fed president

War in Ukraine will weigh on the economy

The economic outlook was revised, with the Fed anticipating higher-than-expected inflation in December and slower economic growth.

The consumer price index is expected to hit 4.1% this year, well above the previous projection of 2.7%.

As for GDP, the 4% growth projected three months ago has been cut to 2.8%, with the Fed admitting that despite the huge uncertainty, the conflict in Ukraine will definitely affect the US economy.

“Russia’s invasion of Ukraine is causing enormous human and economic hardship,” the committee said in a statement. “The implications for the US economy are highly uncertain, but in the short term, the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

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