The Federal Reserve raised its target fed funds rate by 0.25% on Wednesday to a new range of between 0.25% and 0.5%, its first interest rate hike since 2018.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Fed said in a statement.
The Fed also reassured investors that job gains have been strong, the unemployment rate has declined and indicators of economic activity continue to strengthen.
The statement comes after the U.S. added 678,000 jobs in February, significantly above the 440,000 jobs economists were expecting. Wage growth was up 5.1% in the month, and the U.S. unemployment rate fell to 3.8%.
All 11 Fed members voted unanimously to raise interest rates, but committee member James Bullard was the only one that voted for a more aggressive 0.5% hike.
Economic Projections: The Consumer Price Index (CPI) was up 7.9% in February, the highest inflation reading since 1982. Earlier this month, Federal Reserve Chair Jerome Powell told Congress the Russian invasion of Ukraine creates "upward pressure on inflation at least for a while."
On Wednesday, the Federal Reserve released new “dot plot” economic forecasts. The Fed is now projecting six interest rate hikes in 2022. Five members now see interest rates topping 3% in 2024.
Federal Reserve members are projecting a 2022 U.S. unemployment rate of 3.5%, unchanged from December. The committee’s 2022 GDP growth projection dropped from 4% to 2.8%. The Fed’s 2023 GDP growth rate remained unchanged at 2.2%. The Fed is now projecting 2022 PCE inflation of 4.3%, up from previous estimates of 2.6%.
Markets React: The SPDR S&P 500 ETF Trust SPY SPY traded off its highs for the day but remained up 0.5% after the Fed announcement. The yield on 10-year U.S. Treasury bonds increased slightly on Wednesday to 2.21%, up 0.05% on the day.
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