For the first time since 2018, the Federal Reserve raised its benchmark interest rate on Wednesday, stepping away from the emergency posture it had held since the pandemic began. The move — a quarter-point increase with more promised to follow — is the central bank's answer to inflation running at its highest pitch in forty years, a fire fed by war in Ukraine, fractured supply chains, and the long tail of COVID. It is, at its core, a wager that the cost of borrowing can be made high enough to cool prices without making the cost of growth too steep to bear.
Fed Raises Rates 0.25% in First Hike Since 2018 to Combat Inflation
We need to move away from very low interest rates
Mark
So the Fed finally moved. Why did it take until March 2022 to raise rates when inflation had been climbing for months?
Mimi
The Fed had kept rates near zero since the pandemic began in 2020. They were focused on supporting the economy. But by early 2022, inflation was clearly not transitory—it had hit 40-year highs. They had to act.
Luke
Right, but we should be clear: the Fed was late. Inflation started rising in 2021, and they didn't move until March 2022. That's a real lag.
Mark
A quarter point seems small. Is that actually going to do anything?
Mimi
It's the first step. The Fed projected multiple hikes throughout the year, with rates reaching 1.75 to 2 percent by year-end. So this is the opening move in what they're signaling will be an aggressive campaign.
Luke
Though we should note: projections change. The Fed's own forecasts have been wrong before. What matters is what they actually do over the next nine months.
Mark
What's the risk here? What could go wrong?
Mimi
The Fed is trying to cool inflation without causing a recession. But Ukraine just invaded, energy prices are spiking, supply chains are still broken. Raising rates into that environment is risky.
Luke
Exactly. The Fed downgraded growth from 4 percent to 2.8 percent just in this meeting. If they keep raising rates and the economy slows further, they could trigger the very recession they're trying to avoid.
Mark
Did the market panic?
Mimi
No. The Dow was up slightly. Investors had expected this move, so there was no shock.
Luke
But that's also worth noting: the market's calm doesn't mean the policy is right. It just means it was priced in. The real test comes when rates actually start biting into consumer spending and business investment.
Il Polso
- Inflation has reached a 40-year high, forcing the Fed to abandon the near-zero borrowing rates that sustained the economy through the pandemic.
- The quarter-point hike is only the opening move — the Fed projects rates climbing to nearly 2% by year's end, a sharp and deliberate tightening of financial conditions.
- The Ukraine invasion, persistent supply chain breakdowns, and COVID's lingering disruptions have already forced the Fed to slash its 2022 growth forecast from 4% to 2.8%.
- Wall Street took the news in stride, with the Dow edging up slightly — markets had seen this coming, but the harder road ahead is less certain.
- Analysts warn that inflation may not yield until well into 2023, leaving policymakers to walk a narrowing path between cooling prices and triggering a recession.
For the first time since 2018, the Federal Reserve raised its benchmark interest rate on Wednesday, stepping away from the emergency posture it had held since the pandemic began. The move — a quarter-point increase with more promised to follow — is the central bank's answer to inflation running at its highest pitch in forty years, a fire fed by war in Ukraine, fractured supply chains, and the long tail of COVID. It is, at its core, a wager that the cost of borrowing can be made high enough to cool prices without making the cost of growth too steep to bear.
On Wednesday, the Federal Reserve raised interest rates for the first time since 2018, lifting its benchmark rate by a quarter percentage point and signaling that this was only the beginning. The decision, reached after a two-day policy meeting, marked a clear break from the pandemic-era stance that had kept borrowing costs near zero — a posture Fed Chair Jerome Powell acknowledged was no longer suited to the moment. "We need to move away from very low interest rates," he had told Congress earlier in the month.
The Fed projected it would raise rates several more times in 2022, pushing the federal funds rate toward 1.75 to 2 percent by year's end. The logic is familiar: costlier borrowing discourages spending, and less spending takes pressure off prices. The central bank's statement confirmed that further increases would be "appropriate" as it works to bring inflation back toward its 2 percent target.
The backdrop, however, is anything but simple. Officials pointed to three compounding forces — Russia's invasion of Ukraine, the ongoing disruptions of the pandemic, and stubborn supply chain bottlenecks — that together prompted the Fed to cut its 2022 growth forecast nearly in half, from 4 percent to 2.8 percent. Some relief was visible in Tuesday's producer price data, which showed a slight slowing in month-to-month increases, but the year-over-year figure remained at 10 percent.
Markets absorbed the announcement quietly, with the Dow closing marginally higher. Investors had anticipated the move. The harder question is what comes next. Analysts increasingly believe inflation will remain elevated into 2023, meaning the Fed must calibrate its actions carefully — raising rates enough to restrain prices, but not so aggressively as to choke off growth entirely. It is a balance that external shocks, from war to broken supply lines, make ever more difficult to strike.
The Federal Reserve moved to raise interest rates by a quarter percentage point on Wednesday, marking its first increase since 2018 and signaling a decisive shift away from the pandemic-era policies that had kept borrowing costs near zero. The decision came after a two-day policy meeting and reflected the central bank's determination to confront inflation that has climbed to its highest level in four decades.
Fed Chair Jerome Powell and his colleagues made clear this was just the beginning. The central bank projected it would raise rates multiple times throughout the year, with the benchmark federal funds rate climbing to somewhere between 1.75 and 2 percent by year's end—a sharp reversal from the credit-extending measures that had propped up the economy during the pandemic. Powell had told Congress earlier in the month that the current moment demanded a different approach. "We need to move away from very low interest rates," he said. "They're not appropriate for the current situation in the economy."
The mechanics are straightforward: when the Fed raises rates, it becomes more expensive for consumers and businesses to borrow. The theory is that higher borrowing costs will dampen spending on discretionary purchases, which in turn should help bring down prices. The central bank's statement acknowledged that "ongoing increases" in the target rate "will be appropriate" to address the inflation surge.
The Fed's decision reflected a complicated economic landscape. Officials cited three major headwinds: the Russian invasion of Ukraine, which had roiled energy markets and disrupted global supply chains; the lingering effects of the COVID-19 pandemic; and persistent supply chain bottlenecks. These factors prompted the Fed to downgrade its forecast for economic growth this year from 4 percent to 2.8 percent. Data released Tuesday showed producer prices were 10 percent higher in February than a year earlier—unchanged from January's rate—but the month-to-month increase had slowed to 0.8 percent from January's 1.2 percent, suggesting at least a modest deceleration.
Wall Street absorbed the news with relative calm. The Dow Jones Industrial Average closed up about 50 points, or 0.15 percent, having started the day in positive territory. Investors had largely anticipated the rate increase, and the market's muted reaction suggested traders were pricing in what the Fed had already signaled.
Yet the path ahead remains uncertain. Powell and other Fed officials had expected supply chain disruptions to ease naturally over time, which would allow inflation to fall back toward the central bank's 2 percent target before year's end. But analysts now warn that inflation is likely to remain elevated well into 2023, complicating the Fed's balancing act. Policymakers must raise rates enough to cool prices without tipping the economy into recession—a needle that grows harder to thread as external shocks like the Ukraine war continue to ripple through markets and supply networks.
Citazioni salienti
We need to move away from very low interest rates. They're not appropriate for the current situation in the economy.— Fed Chair Jerome Powell
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Economy & Finance