The Federal Reserve on Wednesday raised short-term interest rates for the first time since 2018, as high inflation pushes the central bank to pull back on its extraordinary pandemic-era support.
The U.S. central bank lifted its benchmark Federal Funds Rate by 0.25%, to a target range of between 0.25% and 0.50%. The Fed also noted that the economic outlook remains “highly uncertain” in the face of the war in Ukraine.
By notching up rates, the Fed kicks off a process of raising borrowing costs in the hopes of quelling the demand that may be pushing prices higher.
Projections released by the policy-setting Federal Open Market Committee (FOMC) signal the likelihood of the Fed raising rates up to six more times this year (which would mean rates 1.75% higher at the end of this year than last).
That path is more aggressive than the Fed’s last round of projections (from December), when it predicted only three total rate hikes in 2022.
More rate hikes will be needed to pull inflation back down to its 2% target (as measured in Personal Consumption Expenditures). For comparison, PCE clocked in at 6.1% in February, the fastest yearly pace seen since 1982.
The Fed, however, is warning that inflation will not immediately abate in response to its initial interest rate hikes. The central bank now projects prices to rise by 4.3% over the course of 2022, well above the 2.6% pace it had projected in December. In 2023, the Fed hopes to bring that pace down to 2.7% and then to 2.3% in 2024.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the FOMC statement says.
The median member of the FOMC projects a likelihood that the Fed will have the short-term interest rate between 2.5% to 3% by the end of 2024.