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As expected by the market, the U.S. Federal Reserve announced a rate hike of 0.25%, the first rate hike since December 2018. The Fed’s decision also kicked off a cycle of rate hikes aimed at suppressing inflation that hit a 40-year high during the coronavirus pandemic. The dollar climbed to its highest level in six years against the yen on Wednesday after the Federal Reserve announced a rate hike. Powell expects U.S. inflation to ease in the second half of the year.
After two days of meetings, Fed officials voted 8 to 1 to raise interest rates by 0.25 percentage points, raising the target range for the federal funds rate to 0.25% to 0.5% from the level that was close to zero at the beginning of the new crown epidemic two years ago. Most officials expect rate hikes in the remaining six policy-making meetings this year to gradually bring the benchmark rate back to pre-pandemic levels.
The Fed’s statement after the meeting stated that the high inflation reflects the imbalance between supply and demand during the epidemic, high energy prices, and more extensive price pressures. The Russian military invasion of Ukraine in late February and related events may bring more upward pressure on inflation and depress economic activity. .
In addition, the US Department of Labor announced last week that the US consumer price index (CPI) in February increased by 7.9% year-on-year, a 40-year high.
Most Fed officials expect core inflation to fall to 4.1 percent by the end of the year, up from a forecast of 2.7 percent in December.
After the outbreak of the Russian-Ukrainian war, the severe sanctions imposed on Russia by Western countries may drive up energy and commodity prices. The recent rise in the epidemic in China may also worsen the chaos in the global supply chain, making it more difficult to cool down inflation.
Federal Reserve Chairman Powell said at a press conference after the meeting that the Fed is very concerned about the risk of further rise in inflation and inflation expectations, the Federal Open Market Committee is determined to take “necessary measures” to restore price stability, and the current economic strength is sufficient to cope with the tightening of monetary policy.
Powell pointed out that Russia’s invasion of Ukraine will put inflation under short-term upward pressure, including from commodity prices, supply chains and freight, and many countries and companies have rejected Russian products.
He said the Ukrainian crisis may have spillover effects on U.S. trade activities and supply, and the war in Eastern Europe has hit the United States through multiple channels, describing the war as making supply chain problems more complicated.
However, Powell said that it is still expected that U.S. inflation will fall in the second half of this year, and it is believed that inflation will fall month by month, and inflation will remain high throughout the year, but it will be lower than last year. He pointed out that inflation will take longer than expected to return to target, and if inflation does not moderate, the Fed will take necessary action.