Fed Hikes Interest Rates, Signals Aggressive Fight Against Inflation

The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point and laid out an aggressive plan to push borrowing costs to restrictive levels by next year as concerns about high inflation and the war in Ukraine overtook the risks of the coronavirus pandemic.

The U.S. central bank, in a surprise move, projected the equivalent of quarter-percentage-point rate increases at each of its six remaining policy meetings this year, which would push the target federal funds rate to a range between 1.75% to 2.00% by the end of 2022. By the end of next year the policy rate is projected to be 2.80%, above the 2.40% level officials now feel would slow the economy.

A slowdown, however, may already be underway. Fed policymakers marked down their economic growth estimate for 2022 to 2.8%, from the 4% projected in December, as they began to discount the new risks facing the global economy.

"The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity," the Fed said in a statement that dropped its now longstanding direct reference to the coronavirus as the most direct economic risk facing the country.

The statement marked the end of the Fed's full-on battle against the pandemic, as it raised the federal funds rate and pledged "ongoing increases" to curb the highest inflation rates in 40 years.

The interest rate path shown in new projections by policymakers is tougher than expected, reflecting Fed concern about inflation that has moved faster and threatened to become more persistent than expected, and put at risk the central bank's hope for an easy shift out of the emergency policies put in place to fight the fallout from the pandemic.

On Wall Street, the S&P 500 pared gains after the release of the statement and projections to trade up about 0.8%. The yield on the benchmark 10-year Treasury note rose to 2.212%, the highest since May 2019, and the yield on the 2-year Treasury note climbed to 1.9890%, the highest since June 2019. The U.S. dollar index moved from a small loss to a small gain.

Even with the tougher rate increases now projected, the Fed expects inflation to stay above its 2% target, remaining at 4.1% through this year and dropping only to 2.3% through 2024. The unemployment rate is seen dropping to 3.5% this year and remaining there next year, but is projected to rise slightly to 3.6% in 2024.

The new statement said the Fed expects to begin reducing its nearly $9 trillion balance sheet "at a coming meeting," a topic likely to be addressed further by Fed Chair Jerome Powell in a news conference due to begin at 2:30 p.m. EDT (1830 GMT).

St. Louis Fed President James Bullard was the only policymaker to dissent in the Fed's policy decision.