That’s how soon the Federal Reserve’s benchmark interest rate may reach a 14-year high, showing just how quickly the central bank now plans to raise borrowing costs.
The central bank made its pivot to inflation-fighting mode from economic stimulus mode official Wednesday when it raised its benchmark interest rate from virtually zero, the first increase since 2018 and a widely expected move. But what surprised many economists was the trajectory of the increases it’s still planning. Future hikes will be faster than the Fed previously predicted, in some cases twice as fast.
Fed officials now expect to raise their target for the benchmark fed funds rate to 1.75%-2% this year, double what they’d foreseen in December. And by next year, they anticipate raising it to 2.75%-3%—a range we haven’t seen since 2008 and well above the 1.5%-1.75% they had predicted in December. Indeed, a lot has happened since their December meeting, including the Russian invasion of Ukraine, which threatens to make today’s raging inflation even worse.
The Fed had been walking a tightrope during the pandemic, wary of hurting the economy with higher interest rates even as the low borrowing costs fueled inflation.
Faster rate hikes mean Fed officials “have finally decided to present a more realistic, rather than hopeful, outlook for inflation,” Conrad DeQuadros, an economist at Brean Capital Markets, said in a commentary. “The message from the Fed is that the inflation problem is much worse than policymakers previously thought.”
On Wednesday, Federal Reserve Chair Jerome Powell said the economy is strong enough to absorb aggressive rate hikes. “All signs are that this is a strong economy indeed,” he said during a virtual press conference.
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