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WASHINGTON, D.C. — The Federal Reserve of the United States raised its benchmark interest rate for the first time since 2018 on Wednesday, in an effort to combat the country’s highest inflation in four decades.

“Inflation remains elevated,” the Fed said in a statement following a two-day policy meeting, “reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” adding that the Ukraine crisis and related events are likely to “create additional upward pressure” on inflation and weigh on economic activity.

The federal funds rate target range was raised by a quarter percentage point to 0.25 to 0.50 percent, and the central bank “anticipates that ongoing increases in the target range will be reasonable,” according to the statement.

According to the statement, the central bank plans to start lowering its holdings of US Treasury securities, agency debt, and agency mortgage-backed securities “at a future meeting.”

Prior to the outbreak of the coronavirus disease 2019 (Covid-19) pandemic, the federal funds rate target range was set near zero in March 2020 to stimulate the US economy.

To support markets and lower long-term borrowing costs, the central bank launched an unlimited bond-buying operation.
From roughly 4.5 trillion US dollars two years ago, the Fed’s balance sheet has expanded to nearly 9 trillion US dollars.

With US inflation at a 40-year high and well above the central bank’s objective of 2%, many Fed members have stated in recent months that they would support a plan to begin a series of rate hikes and the unwinding of the balance sheet this year in order to calm the overheating economy.

According to the US Labor Department, the consumer price index (CPI) increased 7.9% from a year ago last month, the biggest 12-month increase since the year ending January 1982.

The rate hike was authorized by the Federal Open Market Committee (FOMC), the Fed’s policy-making body, by an 8-to-1 vote on Wednesday, with St. Louis Federal Reserve Bank President James Bullard dissenting in support of a greater half-percentage-point rise.

Most Fed members expect the federal funds rate to climb to 1.9 percent by the end of this year and roughly 2.8 percent by the end of 2023, according to the Fed’s quarterly economic estimates released Wednesday.

This translates to a total of seven quarter-point rate hikes this year and three or four more next year.

“Of course, these predictions do not constitute a committee decision or strategy, and no one knows where the economy will be a year or more from now,” Fed Chair Jerome Powell said in a virtual press conference on Wednesday afternoon.

“We sense the economy is quite strong and well-positioned to sustain the stricter monetary policy,” Powell said, noting that every Fed meeting is “a live meeting” when it comes to raising interest rates.

“If we come to the conclusion that it is necessary to remove accommodation more swiftly, we will do so. I’m afraid I can’t be more descriptive. However, as the year progresses, there is a distinct possibility “he stated

When asked when US inflation will start to fall, Powell said he expected it to “stay elevated through the middle of the year” before dropping more rapidly next year.

“I’m optimistic we’ll get inflation down,” Powell added, noting that excessive inflation has a negative impact on everyone, particularly those who spend the majority of their income on necessities like food, shelter, and transportation.

“We will not allow rising inflation to become entrenched. That would be too expensive. And we’re not going to put it off any longer than necessary “Added he.

With inflation so high, Desmond Lachman, a senior scholar at the American Enterprise Institute and a former official at the International Monetary Fund told Xinhua that the Fed will design a soft landing for the US economy.

“This is especially true given the Fed’s role in not only inflating the economy, but also in creating a stock, housing, and credit market bubble. There has to be a risk that once the Fed starts raising interest rates more aggressively, those bubbles may bust, resulting in a deep economic crisis “According to Lachman.

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