The move is expected to raise interest rates for the first time in three years as policymakers look to cool red-hot as it comes at a dangerous time for the U.S. economy as it faces a continuing pandemic and a war in Europe.
The U.S. central bank is almost certain to raise its benchmark federal funds rate by at least a quarter of a percentage point at the end of its two-day policy-setting meeting on Wednesday. Investors will be watching the new projections to see how fast Fed officials believe they need to raise rates this year to prevent inflation from getting worse.
In December, most officials predicted that rates would hover around 2.10% by the end of 2024.
Danielle DiMartino Booth, the CEO of Quill Intelligence and former advisor to the Dallas Fed president, predicted a minimum quarter-point rate hike on Wednesday two years after the central bank slashed rates to near zero to blunt the economic pain of the pandemic.
She said the expected rate hike on Wednesday comes at a tricky time, as we are currently facing a slowing economy that is on the brink of a recession and rampant energy and food inflation.
The Labor Department said in February that it had increased in February from the previous year, marking the fastest increase since January 1982, when inflation hit 8.4%. From January, the CPI, which measures a wide range of goods, increased by 0.8%, from gasoline to health care.
The Federal Reserve has been under pressure this year due to a series of interest rate hikes this year, which resulted in the eye-popping reading for the ninth consecutive month the gauge has been above 5%. The federal funds rate tends to create higher rates on consumer and business loans, which slows the economy by forcing them to cut back on spending.
It is important to be humble and nimble, because Fed Chairman Jerome Powell has left open the possibility of a rate hike at every meeting this year, and has refused to rule out a more aggressive half-percentage point rate hike. Powell said earlier this month that the Fed is prepared to do whatever is needed to control inflation, even if that means hurting growth. The Fed must walk an economic tightrope this week as it juggles sky-inflation with the COVID 19 health crisis, including new health restrictions in major Chinese cities, and the Ukraine-Russia war. The central bankers must toe the line without inadvertently crashing the economy.
The Russian invasion, which has caused a massive humanitarian crisis, has upended those plans, and Fed officials have been carefully telegraphing to the public their plans to hike rates to quell inflation. The central bank may have to take a more nimble approach to risk inducing a recession because of the conflict.
The cold-eyed truth is that conditions are too volatile to put forward a coherent forecast at this time, said Joe Brusuelas, RSM chief economist. Everything must be placed in a context of revisions to come.