The Fed raised interest rates for the first time since December 2018 and a majority of Fed officials expect at least another 150 basis points in rate hikes for 2022.
As widely anticipated, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate (the overnight lending rate) by 25 basis points (bps) to 0.25-0.50% at its March meeting. The FOMC cited elevated inflation and strengthening employment. The conflict in Ukraine will have a “highly uncertain” impact on the U.S. economy, according to the FOMC, but will likely dampen growth and add inflation pressures.
“While this rate increase was anticipated,” said Raymond James Chief Economist Scott Brown, “the Fed signaled a higher path for interest rates than the market expected.”
Twelve of 16 senior officials anticipate seven or more rate hikes this year.
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“The Fed expects inflation to moderate in the months ahead,” Brown said, “but if not, it is prepared to raise rates more aggressively down the line.”
The median forecast of senior Federal Reserve officials for 2022 for GDP growth fell from 4% (in December) to 2.8%. The median forecast of inflation rose from 2.6% to 4.3%. Headline consumer inflation was 7.9% in the 12 months ending in February.
Raymond James Chief Investment Officer Larry Adam accurately predicted Powell would instead raise rates 25 bps at this meeting, although sentiment at the time leaned toward 50. Adam believes 25-bps increases will allow the Fed the flexibility to monitor the effect of increased rates on the economy.
“On average, after the first Fed tightening [cycle], the economy tends to expand for an additional five years,” said Adam on February 22. “With this economic expansion only two years old, we believe the Fed has every incentive to make sure it steers us clear of a recession.”
Adam did note that high energy prices may cramp consumer spending and push the Fed to act more aggressively. Brown believes the conflict in Ukraine could dampen growth and lead to higher inflation, which would also push the Fed to take action.
Officials continued to work on a plan to start reducing the Fed’s $9 trillion balance sheet, expected to begin in the months ahead. Details of that discussion will be included in the policy meeting minutes, to be released on April 6. The next FOMC meeting is scheduled for May 3-4.
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