The Federal Reserve raised a key interest rate by a quarter point Wednesday and signaled six more hikes are planned this year in an effort to cool record-high inflation that is squeezing family budgets and bedeviling Democrats and the White House before the midterm elections.
The central bank raised its benchmark overnight interest rate from near zero — its first rate hike since 2018 — in response to prices that are rising at their fastest rates in 40 years. The Fed’s open market committee said it “anticipates that ongoing increases in the target range will be appropriate.”
Fed officials projected inflation to be significantly higher this year than previously forecast, at 4.3%, and fall to 2.3% in 2024. The projection for economic growth was lowered to 2.8% from 4%.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Fed said in a statement.
The central bank said Russia’s invasion of Ukraine is creating “highly uncertain” implications for the U.S. economy.
“In the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity,” the statement said.
Consumer prices rose in February at an annual rate of 7.9%.
“We expect inflation to be high through the middle of this year,” said Fed Chairman Jerome Powell. “In addition to the direct effects from higher global oil and commodity prices, the invasion and related events may restrain economic activity abroad and further disrupt supply chains.”
After the increase was announced, Mr. Powell told a press briefing that the likelihood of a recession in the next 12 months is “not particularly elevated” and that the U.S. economy remains strong.
Stocks plummeted on the Fed’s announcement but then surged higher. The Dow Jones Industrial Average closed up 518 points, or 1.5%, to finish the trading session at 34,063 points. The Nasdaq was up 3.7%, and the S&P 500 finished up 2.2%.
It was the first rate hike since 2018 as the Fed moved from two years of low interest rates and massive pandemic relief to tightening monetary policy. The central bank had lowered rates to near zero to keep the economy moving during COVID-19 shutdowns in the U.S. and the global effects of the pandemic.
The move will raise the cost of interest charges on credit cards and on home equity loans and auto loans. The committee projected a consensus funds rate of 1.9% by year’s end, a full percentage point higher than expected in December.
The committee anticipates three more rate hikes in 2023.
Although the Fed’s action had been expected for weeks, it came with fresh urgency because inflation has shown no signs of easing and could rise further, with Russia’s invasion of Ukraine driving up oil prices.
Congressional Republicans and some economists blame Democrats for higher prices. They say the $1.9 trillion American Rescue Plan signed into law by President Biden last spring wasn’t necessary and flooded the economy with easy money.
“Democrats didn’t listen. They pushed ahead,” said Senate Minority Leader Mitch McConnell, Kentucky Republican. “And for 12 months and counting, working families have been paying a heavy price.”
Mr. McConnell said Mr. Biden’s attempt to blame inflation on Russian President Vladimir Putin’s 3-week-old war was “nonsense.”
“Everybody knows where the buck stops,” Mr. McConnell said. “Democrats’ policies have put working families on a treadmill where they have to run faster and faster every month just to stay in place. Grocery prices are soaring faster than they have since 1981. New cars and truck prices are climbing at their fastest rates ever. Forget about getting ahead and saving. Households are lucky if they are even able to tread water.”
The Democratic National Committee said Mr. Biden has taken “critical action” to lower prices, including releasing oil from the nation’s Strategic Petroleum Reserve.
Addressing the Fed’s nearly $9 trillion balance sheet of Treasurys and mortgage-backed securities, the Fed said it expects “to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”
Fiscal analysts noted that rising interest rates also will affect the federal budget through higher payments on the debt.
“Higher interest rates mean higher interest costs, and that’s a problem when you have a pre-existing condition of growing debt and deficits like we do in the United States,” said Michael A. Peterson, CEO of the Peter G. Peterson Foundation. “Not only do we have an existing $30 trillion in national debt, but the Congressional Budget Office projects that we will borrow a staggering $45 trillion more over the next 20 years.”
He said the CBO has projected that interest payments will nearly triple over the next decade.
“If the average Treasury rate becomes just 1 percentage point higher than CBO anticipated, interest payments would increase by nearly $2 trillion over 10 years,” Mr. Peterson said. “This would mean fewer resources available for important national priorities.”