The Federal Reserve Tightens the Screws

In a widely anticipated move, the Federal Reserve raised its key lending rate, the fed funds rate, by 25 basis points (bp, 1 bp = 0.01%) to 0.25–0.50% at its Wednesday meeting. The Fed forecast six more 25 bp rate hikes at each of its remaining meetings this year, per its Summary of Economic Projections. It would put the fed funds rate at 1.75–2.00% by year-end.

The Fed’s pivot is complete. Last year, the Fed let the economy run hot and dismissed worries about inflation. Today, the Fed is raising interest rates, hoping to cool down the economy and bring inflation under control.

During the press conference that followed its meeting, Fed Chief Powell said he believes the economy is strong and can handle seven rate hikes this year.

More importantly, he repeatedly emphasized “price stability.” In fact, it was a term that he repeated 24 times during his press conference.

But with the war in Ukraine and the spike in oil and various commodity prices, the Fed’s job has become more complicated.

Channeling Paul Volcker

Paul Volcker served as Fed chairman between 1979—1987. Under his leadership, the Fed raised rates sharply to get inflation under control, but it came at a cost—a steep recession in 1981-82.

How aggressive might the Fed become as it hopes to re-establish its inflation-fighting credibility? Seven projected rate hikes this year and another 3 to 4 projected hikes in 2023 are simply that, projections. Much will depend on how the economic outlook unfolds.

But Powell may have provided a hint during testimony before a Senate committee last month.

Powell acknowledged, “We should have moved earlier,” a rare admission by a Fed chairman.

When asked if he would go as far as Volcker did to get inflation under control, Powell said, “I knew Paul Volcker… I think he was one of the great public servants of the era, the greatest economic public servant of the era. And I hope that history will record that the answer to your question is yes.”