Federal Reserve raises rate range to 0.5%; projects more rate hikes in 2022

The Federal Reserve on Wednesday (March 16) approved a federal funds rate hike from 0.25% to 0.5%, with an uncharacteristic suggestion that rate hikes are likely at the six other policy meetings in 2022. The hikes could push the funds rate as high as 2% by year end.

The rate move was the first rate increase since Dec. 19, 2018, when the target rate rose from 2%-2.25% to 2.25%-2.5%.

Wednesday’s vote by members of the Federal Open Market Committee (FOMC) was not a surprise, with the Dow Jones Industrial Average and the broader S&P 500 index ticking higher after the announcement and initial comments made by Fed Chair Jerome Powell. St. Louis Fed President James Bullard was the only FOMC member to vote against the hike. Bullard said he preferred a rate hike to 0.75%.

The funds rate is the target rate at which commercial banks borrow and lend available capital and reserves. One of the biggest impacts of federal fund rate changes is on consumer loans and credit cards.

The Fed statement said the rate increase is an appropriate response to an improving economy and inflationary environment. The statement also included a note about uncertainty related to the Russian invasion of Ukraine.

“Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Fed noted in Wednesday’s statement. “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.”

Based on Fed data provided Wednesday, the Federal funds rate could rise to 2.8% by the end of 2023. Also, Fed economists collectively lowered the 2022 U.S. economic growth estimate from 4% to 2.8%.

Mervin Jebaraj, director for the Center for Business and Economic Research at the Sam M. Walton College of Business at the University of Arkansas, told Talk Business & Politics the Fed move was not a surprise but future rate moves will depend on several global uncertainties.

“Today’s Federal Reserve actions were entirely in line with what the markets were expecting. Judging by the statement they released were also on course to see a steady increase in rates at subsequent meetings. A lot of the path of rate increases will be determined by how much new COVID concerns in China and the Russian invasion of Ukraine hampers already stressed supply chains,” Jebaraj said.