US Federal Reserve plans rate hikes to curb inflation

The United States Federal Reserve on Wednesday announced that it was launching an effort to curb inflation by raising its short-term interest rate, and signaling that it might bring as many as seven rate hikes this year.

Inflation is currently at its highest in the US since the 1970s as the world economy reels from Russia's invasion of Ukraine as well as the ongoing COVID-19 pandemic.

The Fed's updated quarterly projections show that they expect inflation to average at 4.3% this year, much higher than its annual target of 2%. The central bank also issued a new forecast that shows only 2.8% growth is likely in 2022, down from projections of 4.3% in December.

The move marks a sharp U-turn from how the Federal Reserve has operated since the 2008 financial crash and recession, during which time it fought to keep rates ultra-low to promote growth and hiring. Although the move may pay off by driving down inflation somewhat, it will lead to higher loan rates for consumers and businesses in the future.

Some economists worry that with inflation already so high  – it reached 7.9% in February, the highest in four decades  –  and with the war in Ukraine continuing to force gas prices upwards, the Fed may have to raise rates even higher than it now expects and potentially tip the economy into recession.

Fed officials have admitted that they underestimated how high inflation would rise and how long it would last after the pandemic struck, and that they may have waited too long to begin raising rates.

However, the US economy is still expanding somewhat, providing slight relief against higher rates. Consumer spending is remaining steady, the Fed said, and employers are looking to fill a near-record 11.3 million openings, which is far greater than the number of unemployed people in the country.

es/aw (AP, Reuters)