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 4.0% projected in December, as they began to discount the new risks facing the global economy. 
• The Fed noted that 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 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. 
• 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.

(Source: Reuters)