Fed expected to make first rate hike since 2018 amid soaring inflation

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The Federal Reserve is expected to raise its benchmark interest rate for the first time since 2018 and pave the way for rate hikes at most of the remaining seven policy meetings this year as it seeks to fight inflation the highest in four decades.

The U.S. central bank is all but guaranteed to hike the fed funds rate by a quarter of a percentage point on Wednesday, bringing the target range to 0.25-0.50%, in the latest major milestone for the U.S. economy in its post-pandemic recovery.

Fed officials are also expected to revise their interest rate projections upwards this year from the previous three months, when they forecast rate hikes of three-quarters of a point in 2022, followed by five more until in 2024.

Policymakers are expected to signal support for at least four more interest rate hikes in 2022 on Wednesday, on top of the March decision. Three or four more increases are expected for 2023, bringing the federal funds rate closer to a more “neutral” framework that neither stimulates nor limits growth.

The so-called “dot chart” of individual interest rate projections should also show that several Fed officials expect rates to eventually break above a neutral level. Fed Chairman Jay Powell recently estimated the neutral rate to be between 2 and 2.5%.

Underscoring the enormity of the change in just a few months, officials were also split on the need for an interest rate hike as late as last September.

The Fed’s statement and its latest economic projections will be released at 2 p.m. ET, followed by a press conference with Powell shortly after.

The Fed’s move to a much more aggressive policy stance comes despite a sharp escalation in geopolitical tensions stemming from Russia’s invasion of Ukraine, which is expected to largely dampen growth and intensify price pressures. The European Central Bank also turned hawkish this month, scaling back its bond-buying plan as the war boosted inflation expectations.

While the U.S. central bank has in the past delayed major policy decisions during times of acute conflict to avoid exacerbating volatility during turbulent times, soaring inflation and an extremely strong labor market will likely prompt Fed to continue its plans to tighten monetary policy.

Fed officials are also expected to significantly upgrade their inflation forecast, which is derived from the personal consumption expenditure price index. The median estimate of core inflation, which excludes volatile items such as food and energy, is expected to top 3% by the end of the year, up from 2.7% last December. Next year’s estimates are also likely to increase. The core PCE index is at 5.2%.

U.S. economic growth forecasts are also expected to slow from the 5.5% pace forecast in December, while the unemployment rate is expected to hold steady at 3.5%.

The Fed is also likely to shed light on its plans to shrink its huge balance sheet, which has more than doubled in size during the pandemic to $9 billion as the central bank claws back government bonds in as part of its efforts to consolidate the economy.

The process is expected to begin as early as May, with the Fed reducing its holdings of Treasuries at an initial rate of $60 billion per month and its stock of agency mortgage-backed securities by $40 billion as it ceases to reinvest the proceeds from maturing securities. . The pace is set to accelerate over time.

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