The Federal Reserve lifted its benchmark interest rate by a quarter of a percentage point, the first increase since 2018 and the start of what US central bank officials signalled would be a series of hikes this year with further rises expected at all of the six remaining policy meetings.
At the end of its two-day policy meeting on Wednesday, the Federal Open Market Committee increased the federal funds rate by a quarter of a percentage point, bringing the target range to 0.25-0.50 per cent. It is the latest milestone for the US economy in its recovery from the pandemic and the most forceful step to date to combat the highest inflation in four decades.
The committee was not unanimous in its support of the quarter-point increase, however, with James Bullard, president of the St Louis Fed, dissenting in favour of a larger half-point rise.
Federal Reserve chairman Jerome Powell has previously said raising interest rates by increments larger than a quarter point is possible at one or more meetings this year.
The hawkish pivot from Fed policymakers took the wind out of a rally under way in the US stock market
Fed officials sharply revised higher their projections for interest rates this year compared to three months ago, when they had forecast three quarter-point rate rises in 2022, followed by five more in 2023 and 2024.
According to the so-called dot plot of individual committee members’ interest rate projections, policymakers now expect six more interest rate increases in 2022, in addition to the March move.
At least three increases have been pencilled in for 2023, bringing the Fed funds rate to 2.8 per cent, above a “neutral” position that neither boosts nor constrains growth. A majority of Fed officials forecast a neutral rate of 2.4 per cent. No rate rises were forecast in 2024.
Hawkish shift
Underscoring the enormity of a hawkish shift that has taken place in just a matter of months, officials were evenly split on the need for an interest rate increase this year as recently as September.
The hawkish pivot from Fed policymakers took the wind out of a rally under way in the US stock market and sent US Treasury prices sliding, as traders dialed up their bets on how aggressively the central bank will move to tame inflation.
The S&P 500 gave up an advance of as much as 2 per cent earlier in the day to trade just 0.3 per cent higher.
Yields on treasuries jumped higher, with the most intense increases registered in shorter-dated notes that are sensitive to policy moves. The yield on the two-year note jumped 0.12 percentage points to 1.97 per cent, its highest level since May 2019. Yields rise when a bond’s price falls.
The benchmark 10-year treasury yield climbed 0.06 percentage points to 2.21 per cent, also its highest since 2019.
The Fed’s embrace of much tighter monetary policy comes despite a sharp escalation in tensions stemming from Russia’s invasion of Ukraine, which is broadly expected to dent growth and intensify price pressures. The European Central Bank also adopted a more aggressive stance this month, scaling back its bond-buying plan as the war boosted inflation expectations.
In its policy statement released on Wednesday, the Fed acknowledged the geopolitical uncertainty clouding the outlook, but emphasised that the conflict is likely to create “additional upward pressure on inflation and weigh on economic activity”. – Copyright The Financial Times Limited 2022
