Last Wednesday, the Federal Reserve approved a quarter point increase in interest rates. This is the first interest rate hike in three years. However, it won’t be the last for a while. The central bank plans to keep raising the rates incrementally until at least next year.
From Near Zero to Quarter Point Hike
During the pandemic, the Federal Reserve kept interest rates to near zero. The moves aimed to encourage spending even as businesses shuttered or limited operations.
Two years later and with inflation raging, the Fed is now putting a stop to easy money. The policy making Federal Open Market Committee will now raise interest rates by a quarter point, or 25 basis points.
The vote received one dissent. St. Louis Fed President James Bullard wanted the rate higher at 50 basis points.
The quarter point hike brings interest rates to a range between 0.25% to 0.50%. The raise will correspond with an increase in prime rates.
This means financial costs for most consumer credit and loans will now charge higher interest. With the rate increase, the Fed said that slower economic growth will also result.
In addition, the US central bank will continue raising interest rates at specific intervals. During each FOMC meeting, the Fed will implement incremental increases until the interest rate reaches 1.9% by year’s end. Afterward, the committee foresees three additional hikes in 2023.
Fed To Also Reduces Treasury Holdings
The FOMC issued a statement about the quarter point hike in interest rates. The agency said it anticipates that its planned increase rates are appropriate in reducing inflation.
Also, the Fed said it will continue reducing its inventory of Treasury holdings worth $9 trillion. These holdings consist mainly of Treasurys and mortgage-backed securities it bought over the years.
The committee expects a substantial reduction of its holdings moving forward. Fed Chairman Jerome Powell said that the program to reduce its balance sheet should start by May. In addition, the process might be equivalent to another rate hike.
Seven Rate Hikes This Year
Based on the FOMC’s combined projections, 10 members believe that seven incremental rate hikes in 2022 are sufficient to reach the target of 1.9%.
In contrast, eight members expected more than seven rate hikes. “We are attentive to the risks of further upward pressure on inflation and inflation expectations,” Powell said. “The committee is determined to take the measures necessary to restore price stability. The US economy is very strong and well-positioned to handle tighter monetary policy.”
In addition, officials adjusted their economic predictions. They foresee much higher inflation than they earlier predicted. Also, the group also expects slower GDP growth.
Instead of the earlier 2.7% inflation rate prediction, the committee now sees inflation to reach 4.1% growth this year. Core personal consumption expenditures (PCE) will rise to 2.7% and 2.3% in 2022 and 2023.
Afterward, officials expect PCE to stabilize at 2% over the long term. The committee noted that “Inflation remains elevated, reflecting supply and demand imbalances.”
GDP Predictions Fell From 4% to 2.8%
For the Gross Domestic Product, the committee cut their expectations from 4% to 2.8%. They pointed to the Ukraine war as the primary cause for slower GDP growth.
However, the FOMC expects the same GDP growth rate for 2023 and beyond that, they predicted last December. Meanwhile, the group sees the unemployment rate to end at 3.5% this year.
Watch the NBC News’s video discussing How The Federal Reserve’s Expected Interest Rate Increase Will Likely Affect You:
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