The Federal Reserve announced that it is raising interest rates for the first time in three years to help bring the skyrocketing inflation under control.
“With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong,” the Fed said in a statement.
The Federal Open Market Committee said it would raise rates by 25 basis points or a quarter percentage point, bringing them to a range of 0.25%-0.5%.
Officials said they are planning nine more hikes between now and 2023. They expect to raise the interest rates in each of their six remaining meetings in 2022, bringing interest rates to 1.9% by the end of the year. The Fed is then planning three more rate hikes in 2023 but is not planning to raise the rates in 2024.
Under Chair Jerome Powell, the Fed hopes that the rate hikes will achieve a difficult and narrow objective: Raising borrowing costs enough to slow growth and tame high inflation, yet not so much as to topple the economy into recession.
Speaking at a news conference, Powell stressed his confidence that the economy is strong enough to withstand higher interest rates. But he also made clear that the Fed is focused on doing whatever it takes to reduce inflation, over time, to its 2 percent annual target. Otherwise, Powell warned, the economy might not sustain its recovery from the pandemic recession.
“We’re acutely aware of the need to restore price stability,” the Fed chair said. “In fact, it’s a precondition for achieving the kind of labor market that we want. You can’t have maximum employment for any sustained period without price stability.”
At the conference, Powell said he believed that inflation would slow later this year as supply chain bottlenecks clear and more Americans return to the job market, easing upward pressure on wages.
He also suggested that over time, the Fed’s higher rates will reduce consumer spending on interest rate-sensitive items like autos and cars. Americans may also buy less as credit card rates increase. Those trends would eventually reduce businesses’ demand for workers, slow pay raises, and ease inflation pressures. Powell noted that there are a near-record number of job openings, leaving 1.7 available jobs, on average, for every unemployed person.
As a result, he expressed confidence that the economy remains sturdy enough for the Fed to carry out a series of rate hikes without causing a downturn.
“All signs are that this is a strong economy,” Powell said, “one that will be able to flourish in the face of less accommodative monetary policy.”