(CNN) –– The Federal Reserve, also known as the Fed, decided to raise interest rates for the first time since 2018. announced the central bank this Wednesday following its highly anticipated monetary policy meeting.
The move marks the end of the Fed’s pandemic-era easy money policy and comes amid a skyrocketing inflation across the United States. The fed funds rate now stands at 0.25-0.5%.
“We think the economy is very strong and will be able to withstand tighter monetary policy,” acting Fed Chairman Jerome Powell told reporters during Wednesday’s post-meeting news conference.
The quarter-percentage-point hike had been well telegraphed by the central bank, with Powell hinting at it repeatedly in recent months. Earlier this month, he told lawmakers he favored a quarter-point increase.
This is the first rate hike since December 2018 and the first time rates have moved from their near-zero level since the bank cut them almost exactly two years ago in March 2020 in the wake of the pandemic.
Fed’s first hike in years
This is the first interest rate hike the Fed has made since December 2018. And it’s also the first time rates have moved from their near-zero level, when the bank stopped them almost exactly two years ago, in March 2020, due to the pandemic.
Prices have skyrocketed over the past year for most Americans. Precisely, inflation is above the Fed’s long-term target of 2%. Which has put pressure on the central bank. The Federal Reserve has a dual task of keeping prices stable and employment at a maximum.
But during the pandemic, costs have risen due to high demand, supply chain chaos and higher energy costs. Powell initially referred to pandemic inflation as “transient,” before dropping the term during a congressional hearing last November.
In the year ending in February, consumer prices increased by 7.9%, while prices that US producers received for its products soared 10% during the same period. None of the figures are adjusted for seasonal changes.
Meanwhile, the recovery of the US labor market has happened quickly following the impact of the lockdown in the spring of 2020, which marked the largest loss of jobs in history. As of February, the country was still short of 2.1 million jobs compared to the same month two years earlier.
Between the strength of the labor market and high inflation, only half of the Fed’s objective is met.
projections
Wednesday’s policy update also included new projections from the Federal Reserve. Models show that Fed officials expect an average fed funds rate of 1.9% by the end of this year, before raising it to 2.8% in 2023. But the central bank might also raise rates faster, if inflation is not moderating.
Officials also revised upward their inflation forecasts to a median of 4.3% for the end of the year. Which compares to the 2.6% that was projected in December.
Meanwhile, US economic growth has slowed to a median 2.8% this year, from 4% expected in December.
The Russian invasion of Ukraine is adding more uncertainty to the economic outlook.
“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 Fed said in Wednesday’s statement.
