US Federal Reserve lifts interest rates for first time since 2018
The US central bank has fired the starter’s gun on higher rates and flagged another six increases this year alone to combat rampant inflation.
The US Federal Reserve has fired the starter’s gun on higher interest rates throughout the developed world, lifting its benchmark rate by 0.25 percentage points with strong prospect of another six increases this year to curb the highest inflation in 40 years.
Amid the war in Ukraine that threatened even higher inflation Chairman Jerome Powell on Wednesday (Thursday AEDT) said the Fed would lift its benchmark rate from zero, the first increase since 2018, and the start of a rate hiking cycle expected to leave the funds rate near 1.875 per cent by December.
“The implications for the US 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 Fed said in a statement that accompanied its two-day meeting.
“Every meeting is a live meeting,” said Mr Powell at a press conference on Wednesday, suggesting the Fed would lift interest rates even faster if inflation remained elevated, noting “ongoing increases in the target range would be appropriate.”
Stripping out volatile food and energy items, the ‘core CPI’ rose 6.4 per cent over the year to February, the fastest pace index, since 1982, including a 6.6 per cent increase in the price petrol in a single month, as Russia’s invasion of Ukraine triggered a surge in energy prices globally.
The 8 to 1 decision by the Fed’s policy committee – one member dissented in favour of an even larger increase – pointed to the challenges for the US and global economy, weighed down by huge personal and government debt after the Covid-19 pandemic.
“Even after the rally in rate expectations in recent days, the Fed’s own projections are on the hawkish side,” said Paul Ashworth, chief US economist for Capital Economics.
“The median dot in the Summary of Economic Projections now shows seven interest rate hikes in 2022 — up from the three projected at the December meeting,” Goldman Sachs economists said in a statement, referring to the visual depiction of each of the voting member’s outlooks for short-term outlook for rates.
The yield on US 10-year bonds rose to around 2.24 per cent from 2.16 per cent on Tuesday, a relatively sharp increase that suggested Russia’s invasion of Ukraine wouldn’t slow the Fed’s path of interest rates increases.
“It seems very much like they wanted to send a message that they’re fighting inflation and they’re going to fight it fast and get it under control,” said Kathy Jones, chief fixed income strategist at the Schwab Centre for Financial Research.
The blue-chip US benchmark share index S&P 500 closed up 2.2 per cent on Wednesday, while the tech-focused Nasdaq Composite advanced 3.8 per cent.
The prospect of higher interest rates adds to a challenging political situation for US President Joe Biden and Democrats facing midterm elections later this year, where record inflation and cost of living, supercharged by the highest petrol prices on record, will feature prominently.
The White House has sought to blame rising inflation on Russia’s invasion of Ukraine, which has wrought havoc in global energy markets, initially lifting the price of oil to highest level since 2008, although prices have declined in recent days to a little below US$100 a barrel.
The Federal Reserve also indicated it would begin to shrink its record $US9 trillion balance sheet as soon as May, following an extraordinary period of balance sheet expansion when the Covid-19 pandemic prompted central banks into extreme stimulatory measures two years ago.
“It will be faster than the last time, and of course it’s much sooner in a cycle than last time,” Mr Powell said.
The Bank of England, also battling record inflation, above 5.5 per cent, is poised to lift its benchmark interest rate tomorrow, which would be the third consecutive increase.
The Reserve Bank of Australia, where inflation has increased to 3.5 per cent throughout 2021, is expected to begin lifting interest rates this year as well.
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