Federal Reserve’s Long-Awaited Rate Hike Is Here: Powell Announces 0.25% Increase

Topline

The Federal Reserve announced a 0.25% interest rate hike on Wednesday—the first increase since 2018, while also forecasting a more-than-expected six additional hikes this year, as the central bank looks to combat surging inflation and ease concerns about the economic impact from Russia’s invasion of Ukraine.

The central bank predicted six more rate hikes ahead in 2022.

Tom Williams/Pool via ASSOCIATED PRESS

Key Facts

The Federal Reserve raised interest rates by a quarter percentage point—the first increase in more than three years—as it looks to address surging inflation, which remains at 40-year highs, up 7.9% from a year ago.

Fed officials said in a statement that they predict six more rate hikes this year and three more in 2023 (up from a previous forecast of three rate hikes each year).

The central bank now sees a consensus federal funds rate of 1.9% by the end of 2022, though it “anticipates” that ongoing increases in the target rate “will be appropriate.”

Fed policymakers had been indicating for months that they would begin raising rates in March starting with a 0.25% increase, though Fed Chair Jerome Powell had stressed before the meeting that the central bank is prepared to raise interest rates “more aggressively” if higher inflation persists.

Fed officials have also been warning about the “highly uncertain” economic impact from Russia’s invasion of Ukraine, describing that the conflict is likely to “create additional upward pressure on inflation and weigh on economic activity.”

Stocks fell immediately after the Fed announcement, with the Dow Jones Industrial Average giving up a nearly 500-point gain from earlier in the day.

What To Watch For:

How quickly the central bank will unwind its massive balance sheet. The Federal Reserve said it would “begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting,” according to a statement.

Surprising Fact:

The 0.25% interest rate increase was approved on an 8-to-1 vote: St. Louis Fed President James Bullard had advocated for a 0.50% rate hike instead.

Crucial Quote:

The Fed’s statement “isn’t too shocking,” says Vital Knowledge founder Adam Crisafulli, pointing out that “the language on inflation is strengthened, as one would have expected.” More worryingly, he says, the central bank warned that the Russia-Ukraine conflict will have “stagflationary implications (hurting growth and boosting inflation)” for the U.S. economy.

Key Background:

Stocks have had a dismal start to 2022, with investors not only whipsawed by the Federal Reserve’s tightening monetary policy but also by Russia’s invasion of Ukraine. The ongoing conflict has dragged markets lower and led to a surge in energy prices that has only exacerbated high inflation: Oil prices recently surged to a high of around $130 per barrel, and though they’ve moderated somewhat, gas prices are soaring. The S&P 500 now sits in correction territory—more than 10% below its record high earlier this year, while the tech-heavy Nasdaq Composite briefly fell into a bear market in recent weeks. Wall Street experts are now warning of rising recession risks, with some predicting stocks to fall into a bear market this year while the U.S. economy becomes plagued by stagflation—high inflation and slow economic growth.