Liftoff: Fed Hikes Rates, Signals More to Come

The Federal Reserve announced a 25-basis-point increase in the target range for the federal funds rate, to a range of 0.25% to 0.50%, its first rate hike since December 2018.

Since Fed Chair Jerome Powell had already signaled that a rate hike was coming, the market was focused on the Fed’s guidance on the outlook for the economy, inflation, and the future path of policy rates. That was surprisingly “hawkish,” with the Fed suggesting a fast cycle of steady rate hikes over the next two years, bringing the federal funds rate to a peak of 2.75 in 2024, a steeper path than anticipated. It most likely reflects the Fed’s concern that it has fallen behind the curve on inflation and now must act quickly to bring it down.

Statement changes: The Federal Open Market Committee (FOMC) statement attributed the need for rate hikes to the strength of the economy and the very tight labor market, which is pushing up wages and inflation. We know that Powell pivoted toward hiking rates in December when the Employment Cost Index (ECI) rose sharply, and this confirms that the Fed’s focus is squarely on the potential inflationary impact of a tight labor market.

Is a soft landing possible with a steep take off?

The Fed’s economic projections are painting a scenario of a “soft landing” with inflation retreating while the unemployment rate stays low and economic growth slows down from the post-pandemic rate of over 4% to its estimate of a long-term sustainable rate of about 2.0% to 2.5%. However, past history would suggest that if the Fed follows through on its plans, the risk of a downturn in growth and/or recession would likely increase.

Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents

Notes: For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. The central tendency excludes the three highest and three lowest projections for each variable in each year. The range for a variable in a given year includes all participants' projections, from lowest to highest, for that variable in that year. Longer Run projections for Core PCE are not collected.
Source: Federal Reserve Board, 3/16/2022.