The Federal Reserve is poised to raise interest rates on Wednesday – a move to combat soaring inflation as the U.S. comes out of the pandemic and economic uncertainty in the wake of Russia’s invasion of Ukraine. The expected quarter-point hike comes as prices have risen at their fastest pace in 40 years.
Federal Reserve Chairman Jerome Powell said at a congressional hearing earlier this month that he supports raising the federal funds rate by 0.25%. Interest rates have been near 0% for about two years since the central bank cut rates as the coronavirus pandemic started in March 2020. This will be the first time the central bank has hiked the rate since the end of 2018.
Prices have increased 7.9% over the past year – the fastest rate of inflation since 1982. Last month, prices were up 0.8% – an acceleration from January. Personal consumption expenditures, the preferred measure used by the Federal Reserve, showed prices, excluding often-volatile food and energy, up 5.2% from a year ago and 0.5% in January.
While Powell signaled how much he wanted to raise the rate at the March meeting, he did not say how often he saw the Federal Reserve raising rates or by how much at subsequent meetings. Some economists have called for a more aggressive approach – with a .50% rate hike right out of the gate.
“They’re behind the curve,” said Greg McBride, chief financial analyst for Bankrate.com of the Federal Reserve. “If it hadn’t been for the situation in Ukraine, there’s a fair chance they would have come out of the box with a larger half-point increase.”
The United States and its allies have slapped sanctions on Russian banks, businesses and individuals and restricted trade over its invasion of Ukraine, adding uncertainty as the Central Bank moves to rein in soaring prices.
“The timing couldn’t be worse for the Federal Reserve, which is already chasing inflation for the first time since the 1980s,” said Grant Thornton chief economist Diane Swonk. “The disruptions we are seeing are adding fuel to a well kindled inflation fire that goes well beyond the energy sector and could touch much more of our daily lives.”
Meanwhile, inflation expectations for the short and medium term have gone up, according to the latest survey from the Federal Reserve Bank of New York, reversing declines in January.
As prices continue to skyrocket, economists have been increasing their forecasts on how many times the Fed will raise rates this year – which could be as many as seven times.
If the Federal Reserve raises the federal interest rate, borrowing costs are going to go up for consumers. For credit card holders, a first increase of 0.25% may be inconsequential but multiple rate hikes over the next year or so could add up.
“It’s that cumulative effect that should prompt you to take action now,” said McBride. “Look to grab a 0% or other low rate balance transfer offer that can insulate you from the rate hikes we expect to see.”
Mortgage rates have already been going up over the past few months in anticipation of higher rates and due to inflation. Auto loan rates are also expected to rise.
Should the Fed be more aggressive with raising interest rates, coupled with tightening spending power from higher costs for goods such as food and gas, economists have warned the chances of a recession next year have gone up.
But speaking Friday ahead of the Fed meeting, Treasury Secretary Janet Yellen, who previously chaired the Federal Reserve, said the economy is strong and households in general are in good financial shape. She noted record job creation and declines in unemployment. Last month, the unemployment rate hit 3.8%.
“One reason one might worry about a recession is that you think that monetary policy in bringing down inflation can cause that. We have seen that on some occasions in the past, but we’ve also seen episodes in which there is a soft landing,” said Yellen. “I have confidence in the Fed to get inflation under control without causing a recession.”