Fed Raises Interest Rates for First Time Since 2018 to Dampen Inflation

Mandatory Credit: Photo by Shutterstock (12832409g)UNITED STATES - MARCH 3: Federal Reserve Chairman Jerome Powell testifies during the Senate Banking Committee hearing titled "The Semiannual Monetary Policy Report to the Congress" in Dirksen Building in Washington, D.
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With U.S. inflation at a 40-year high and in a highly anticipated move, on March 16, the Federal Reserve raised rates for the first time since 2018, by a quarter percentage point, or 25 basis points.

“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,” the FOMC said in a statement.

The Fed added that it anticipates that ongoing increases in the 0.25% to 0.5% target range will be appropriate.

While indicators of economic activity and employment have continued to strengthen with strong job gains and a declining unemployment rate, the Fed said that inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures.

The only vote against the hike was from James Bullard, who preferred at this meeting to raise the target range for the federal funds rate by half of a percentage point to half to three-quarters percent, according to the FOMC statement.

Jeanniey Walden, CMO of DailyPay, told GOBankingRates that after two years of unprecedented monetary and fiscal stimulus “that helped fuel prices in everything from houses to blouses, the Fed is finally taking away the punch bowl.”

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“The FOMC announced its first interest rate increase since 2018 and telegraphed six more 25 basis point hikes this year alone. At the same time, it will soon begin to unwind its massive $9 trillion balance sheet, which is three times as large as during the taper tantrum of 2013 when there weren’t even any rate hikes,” Walden said. “Chairman Powell faces a tall task in turning the Fed aircraft carrier on a dime during a perfect storm of surging inflation, geopolitical risks, market volatility and dislocated supply chains. But the supply chain American businesses are most struggling with is the labor supply, which is barely half of what employers need to fill open positions. So while the Fed has cautioned that rising rates can hamper employment, it should have plenty of cushion at least on that front.”

According to the FOMC officials’ median projection rates would reach 1.9% at the end of 2022 and then rise to 2.8% in 2023.

For the American consumer, the rate hike means that borrowing money will become more expensive, whether it’s via credit cards, business loans or mortgages.   

Dottie Herman, vice-chair Douglas Elliman, told GOBankingRates that “interest rates will impact affordability but not enough to stop the strong housing market.”

“When you consider the history of interest rates, we are still historically low. If anything, this gives people more incentive to buy now before future increases. There is a shortage of housing supply all over the country, there are many more buyers than there is supply and the interest rates will continue to push people to move — and it will still remain a seller’s market,” Herman said.

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John Moshier, President of small business lending, Ready Capital holds a similar view in terms of how the rates will affect business loans.

“Let’s not forget that any rate increase comes at a time in which interest rates are at historic lows. Even with the 25-basis point adjustment, the rates on a 7(a) loan will still be highly attractive for borrowers looking for capital to grow their businesses. The average 7(a) loan is around $500,000, so each 25-basis point rate hike results only in an additional $1,250 a year in interest. Plus, lenders typically build in a “cushion” for 7(a) borrowers as part of the approval process, so while a modest rate increase will surely add a burden to the business’ debt service, the increase will generally be manageable for most 7(a) borrowers,” he said.

According to FOMC officials’ projections, GDP growth will be at 2.8% in 2022 and 2.2% in 2023, with a “longer run” of 1.8%, according to Fed meeting participants projections, released March 16. These projections are lower than those anticipated In December, which called for 4% economic growth in 2022. Unemployment rate projections are 3.5% for 2022, 3.5% for December 2023, to the Fed.

In terms of inflation, officials’ projections are higher than those anticipated in December 2021, with 4.3% in 2022, compared to 2.7%, followed by a projection of 2.7% in 2023.

Speaking at a press conference following the FOMC statement, Fed Chair Jerome Powell said that “the economy often evolves in unexpected ways,” and that the Fed needs to be nimble.

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He added that the probability of a recession in the next two years is not particularly elevated.

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