https://thehill.com/policy/finance/economy/598450-fed-announces-interest-rate-hikes-to-combat-record-inflation

The Federal Reserve on Wednesday increased its baseline interest rate range, launching the first in what will likely be a series of rate hikes meant to fight inflation.

The Federal Open Market Committee, the panel of Fed officials responsible for setting monetary policy, increased the federal funds rate by 0.25 percentage points to a range of 0.25 to 0.5 percent. The federal funds rate is the benchmark interest rate banks charge on loans to each other and is used to set borrowing costs on credit cards, automobile loans and mortgages.

“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 FOMC said in a statement.

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“In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate.”

The FOMC also projected roughly six more rate hikes this year, along with slower growth and higher inflation 

Fed officials signaled for months that they would hike rates and begin pulling back stimulative interest rates in March after two years of rapid economic growth and high inflation.

The hike comes almost exactly two years after the Fed slashed rates to near-zero levels and began buying billions of dollars of Treasury bonds and mortgage-backed securities each month to stimulate the economy through the COVID-19 recession.

The U.S. economy has since recovered all but 2.1 million of the more than 20 million jobs lost during the onset of the pandemic, grew by 5.7 percent in 2021 and powered consumer spending well above pre-pandemic levels.

Economists credit unprecedented stimulus from both the Fed and Congress along with the quick development of effective COVID-19 vaccines for the swift recovery of the U.S. economy.

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Even so, the economy’s rapid rebound came with a spike in consumer prices. As vaccines and stimulus powered a surge in consumer demand, pandemic-driven supply constraints, labor shortages, manufacturing backlogs, shipping bottlenecks and shutdowns abroad pushed prices higher.

Annual inflation as measured by the personal consumption expenditures price index, the Fed’s preferred gauge, hit 6.1 percent in January 2022 — three times the Fed’s annual average target of 2 percent.

While high inflation was limited to a few sectors hit hard by specific supply shortages earlier in 2021, prices for food, energy, shelter and a wide range of services have begun to increase at faster rates in recent months. Fed Chairman Jerome PowellJerome PowellRaskin withdraws Fed vice chair nomination Banking chairman sticking with Raskin despite Manchin opposition Russian war, inflation pinch US economy MORE has called high inflation the biggest threat to an otherwise strong economy and previously acknowledged to members of Congress the bank had misjudged how long it would last.

The Fed held off on hiking rates through 2021 as inflation rose, expecting prices to cool off as the impact of fiscal stimulus faded and supply chains kicked back into gear. But the emergence of the delta and omicron COVID-19 variants exacerbated many of the forces behind high inflation.

The war in Ukraine and recent COVID-19 outbreaks in China have also threatened to fuel more price increases for food and energy.

“What the textbook says is the shock is going to come and it’s going to go and and you shouldn’t react to it,” Powell told the Senate Banking Committee last week. “Hindsight says we should have moved earlier and that that turned out to be wrong.”

“It’s just taking so much longer for the supply side to heal than we thought,” he continued. “There really is no precedent for this.”

Some economists have expressed concerns the Fed could now be forced to hike rates high enough to seriously slow the economy in order to curb inflation. The Fed had faced pressure for months from some lawmakers, investors and policymakers to hike far sooner than it did over concerns over a future inflation-driven recession.

Updated at 2:31 p.m.

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