Fed makes first rate hike since 2018, signals 6 more this year

NEW YORK • The Federal Reserve raised interest rates by a quarter percentage point and signalled hikes at all six remaining meetings this year, launching an aggressive 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 the key rate to a target range of 0.25 per cent to 0.5 per cent, the first increase since 2018, after two years of holding borrowing costs near zero to insulate the economy from the coronavirus pandemic.

"The American economy is very strong and well positioned to handle tighter monetary policy," Mr Powell told a press conference two days ago following a meeting of the Federal Open Market Committee (FOMC).

Mr Ryan Sweet, head of monetary policy research at Moody's Analytics, said: "This is going to be a pretty aggressive tightening cycle, I don't know if the Fed is going to pull off a soft landing."

The hike is likely the first of several to come this year.

In the Fed's so-called dot plot, officials' median projection was for the benchmark rate to end this year at about 1.9 per cent and then rise to about 2.8 per cent next year.

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 FOMC said in its policy statement following the two-day meeting in Washington.

The Fed said it would begin allowing its US$8.9 trillion (S$12 trillion) balance sheet to shrink at a "coming meeting" without elaborating.

Mr Powell said officials had made good progress this week in nailing down their plans and could be in a position to begin the process at their May meeting, though the FOMC had not taken a decision to do so.

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.

The Fed faces the arduous task of securing a soft landing for the world's largest economy, a rare outcome.

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 roil markets and tip the economy into recession.

Complicating the job: The war 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 anticipated, at 4.3 per cent this year but still coming down to 2.3 per cent in 2024.

The forecast for economic growth this year was lowered to 2.8 per cent from 4 per cent, while unemployment projections were little changed.

The pivot to tighter monetary policy is sharper than policymakers expected just three months ago, when their median projection was for just three quarter-point rate increases this year.

Forcing the pace is a surge in inflation that has proved stronger and more sustained than anticipated. The consumer price index soared 7.9 per cent last month, the most since 1982; the Fed's 2 per cent inflation target is based on a separate gauge, the personal consumption expenditures price index, which rose 6.1 per cent in the 12 months through January.

The Fed is not alone in turning more hawkish. The European Central Bank last week made a surprise announcement that it would be more aggressive in paring back bond buying.

The Bank of England is also set to lift rates on Thursday for a third straight meeting, while Brazil's central bank is predicted to hike by another 100 basis points on Wednesday.

BLOOMBERG