By Miya Tanaka,
The U.S. Federal Reserve said Wednesday it will raise key interest rates for the first time since 2018 and signaled six more rate increases this year to tame high inflation, with Russia's war in Ukraine adding to concerns of elevated prices including for energy.
Upon concluding a two-day meeting of the policy-setting Federal Open Market Committee, the bank said it will lift its target range for the federal funds rate to 0.25 to 0.5 percent, after maintaining the level at near-zero since March 2020 to support the economic recovery from the downturn triggered by the coronavirus pandemic.
A rise in U.S. interest rates can have profound impacts on the global economy, possibly leading to capital flows from emerging markets and contributing to a weaker yen as investors are prompted to buy the dollar.
Facing the delicate task of restoring price stability without tipping the world's largest economy into recession, Fed Chairman Jerome Powell said after the policy meeting that the U.S. economy is "very strong" and "well-positioned to withstand tighter monetary policy."
"Inflation is likely to take longer to return to our price stability goal (of 2 percent inflation) than previously expected," Powell admitted, but added, "We're fully committed to bringing inflation back down and also sustain the economic expansion."
Globally, monetary policy has been pivoting toward tightening amid rising prices, with the Fed earlier deciding to end its pandemic-era bond-buying program, the Bank of England starting rate hikes in December and the European Central Bank reducing its net asset purchases. In contrast, the Bank of Japan is expected to maintain accommodative monetary policy for the time being.
The Fed said in a statement on Wednesday that it will also start reducing the size of its balance sheet, which has swelled to nearly $9 trillion due to its asset purchases. Powell said the move may come as soon as the next policy meeting in May.
In its new economic projection also released Wednesday, the Fed expected six more quarter-percentage-point rate hikes this year, with the median projection of its policymakers foreseeing the Fed's short-term benchmark rate to reach 1.9 percent. Further rate increases were also expected in the following year.
Inflation, gauged by the price index for personal consumption expenditures, was projected to rise to 4.3 percent by the end of 2022 from a year before, a sharp upward revision from the December forecast of a 2.6 percent rise. It will then fall to 2.7 percent by the end of 2023, revised upward from 2.3 percent.
The Fed forecast U.S. gross domestic product will grow a real 2.8 percent in the fourth quarter of 2022, revised downward from the 4.0 percent expansion estimated in December, while expecting a 2.2 percent rise next year, unchanged from the previous estimate.
Powell warned that the implications of the Russian attack on Ukraine for the U.S. economy are "highly uncertain" and the surge in prices of crude oil and other commodities as a result of the invasion will "put additional upward pressure on near-term inflation here at home."
Concerns over supply disruptions have pushed up global energy prices and food costs, given that Russia is one of the world's largest oil producers, while Russia and Ukraine make up 30 percent of the world's total wheat exports.
The consumer price index in the United States surged 7.9 percent in February from a year earlier, marking the fastest jump since January 1982.
The Fed was saying last year that inflation would be "transitory," driven by the supply side which faced difficulty in coping with a big spike in demand as the economy reopened following an abrupt pandemic-induced shutdown.
But supply disruptions have been "larger and longer lasting than anticipated," exacerbated by waves of the coronavirus in the United States and abroad, and price pressures have spread to a broader range of goods and services, Powell said.
Inflation is feared to derail the economic recovery, as it erodes the value of income and dampens demand.
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