MARCH 21, 2022 – THE FED RAISES INTEREST RATES BY 0.25 PERCENT
As anticipated, the FOMC, with a vote of 8-1, agreed to a quarter point rise in interest rates last week. The dissenter, St. Louis’ Bullard, wanted rates to rise 0.5%. Most officials expect the fed-funds rate to rise to at least 1.875% by the end of this year, 2.75% by the end of 2023, and through 2024. The FOMC statement signaled the Fed could soon announce and implement a plan to shrink its $9 trillion asset portfolio.
The implication is a total of seven quarter point increases this year and another three or four next year. This is a much faster pace than officials predicted in December, when 3 quarter point increases were anticipated. The pace of increases would be similar to the run between 2004-2006, when the Fed raised rates 17 times in succession. Seven officials projected the Fed would need to raise rates at least once by a half-percentage-point.
The Fed cited the need to raise rates as inflation’s “broader price pressures” and the war in Ukraine and the “related events are likely to create additional upward pressure on inflation.” Even before the Russian invasion of Ukraine, the Fed was concerned inflation was not going to decline as quickly as they hoped. The labor market is tight with unemployment at 3.8% and wage growth is at its highest pace in years. Some economists worry the rate increases will bring on a recession, especially if inflation expectations lead into a wage-price spiral.
If you believe in the Fed’s outlook and the ongoing steady rises in interest rates, now would be a good time to reassess your hedging programs. The opportunity to lock into historically low rates will not be around for long.