FOMC meet outcome: The US Federal reserve to hike interest rate by 0.25%
Investors and economists were eagerly waiting for the Federal Open Market Committee (FOMC) meeting scheduled for 15 and 16 March 2022. In line with widespread expectation, the committee has raised the target range for the federal funds rate by 25 basis points (bps). The new target range is 25-50 bps. The Federal Reserve raised rates for the first time since 2018.
Voting Outcome: Out of the nine members, eight voted in favour of a 25 bps rate increase, including Fed Chair Jerome Powell and Vice-Chair nominee Lael Brainard. Only James Bullard favoured a rate hike of 50 bps.
Updates from the meeting
- The committee informed the press that the economic activity and employment have continued to strengthen in the US.
- There have been job gains in recent months, and the employment rate has declined substantially.
- However, inflation remains elevated, and it has caused supply and demand imbalances. The higher energy prices and broader price pressures still remain.
- The implications for the US 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 committee also said it plans to reduce its holdings of US Treasury securities, US agency debt, and US agency mortgage-backed securities (MBS). The Fed could start reducing the size of the holdings on its balance sheet as soon as May.
Impact of higher interest rates
Higher interest rates could potentially lead to higher unemployment rates. However, the Fed has made clear that the Fed's focus is on achieving price stability by addressing inflation. The move will correspond with a hike in the prime rate and immediately send financing costs higher for many forms of consumer borrowing and credit.
Powell said in a statement, "The plan is to restore price stability while also sustaining a strong labour market. That is our intention and we believe we can do that. But we have to restore price stability."
Fed’s macroeconomic expectations:
- The Fed expects inflation to return to 2%. However, the comeback will take longer than the Fed initially expected. The median inflation projection among FOMC members is 4.3% for the year.
- The Fed now projects 4.3% PCE inflation in 2022, up from 2.6% in December.
- The central bank expects it to decline to 2.7% in 2023 and 2.3% in 2024, but those are also above the December projections.
- For economic growth, the Fed now sees 2.8% GDP growth in 2022, down from 4.0% in previous projections.
What to expect from the Fed in future meetings?
- The Fed expects to raise rates at each of its remaining meetings this year. Six rate hikes (in the remaining meeting) points to a consensus funds rate of 1.9% by the end of 2022. However, future rate increases will come with caveats.
- One of the Fed's members said, "We may see a more dovish approach to tightening, rather than the aggressive approach we have been primed for over the past year."
- The committee sees three more hikes in 2023 then none the following year.
- In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.
- Fed Chairman Jerome Powell at his post-meeting news conference hinted that the balance sheet reduction could start in May, and said the process could be the equivalent of another rate hike this year.