US Federal Reserve approves first interest rate hike since Covid-19 outbreak

The Federal Reserve raised US interest rates on Wednesday for the first time since the 2020 outbreak of the coronavirus pandemic and said there could be another six hikes this year if inflation remains high.

Although US economic growth was robust with a projected 4.3 per cent this year, 2.2 per cent in 2023 and 2 per cent in 2024, challenges from the Russia-Ukraine crisis might be just as great, Chairman Jerome Powell said as the Fed raised rates to between a quarter and half percentage point from a previous zero to a quarter percentage point.

The central bank forecast inflation at 4.3 per cent for 2022, versus its typical target of 2 per cent a year. Crude oil's surge this month to 14-year highs of almost USD 140 a barrel and multi-year highs in many other commodity prices will add to inflationary pressure, it warned.

Powell said the Russian-Ukraine conflict also represented multiple downside risks for the United States.

"The implications ... for the US economy are highly uncertain," he said. "In addition to the direct effects from higher global oil and commodity prices, the invasion and related events may restrain economic activity abroad, and further disrupt supply chains."

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Powell said the conflict may have ramifications for US trade too. Aside from putting a raft of sanctions on Russian businesses, products, and individuals, the United States has also banned all energy imports from the country.

"You're going to see supply chain issues around shipping and around, you know, lots of countries and companies and people not wanting to touch Russian goods," he said. 

"So, that's going to mean more tangled supply chains. That could actually push out the relief we were expecting on supply chains generally."

All in, Powell said, inflation was expected to remain high at least until the middle of the year as supply lines get more entangled from the conflict and the US actions against Russia.

Powell said the Fed's policy-making Federal Open Market Committee, or FOMC, is scheduled to meet another six times through December and there was a chance the committee could approve a hike each time, making for a total of seven rate hikes for 2022.

On top of those hikes, the Fed will also attempt to reduce its balance sheet, which now stands at USD 8.9 trillion after the central bank loaded up on Treasuries and mortgage-backed securities to support the economy since the COVID outbreak."In terms of the pacing, I would point out that there are seven remaining meetings and seven rate hikes. I would add there's also the shrinkage of the balance sheet," Powell said.

The combined action will reduce the cash in the financial system, bringing uncertain consequences for bond and stock markets.

Economists warn that if inflation does not begin to subside in response to these initial moves, policymakers will end up raising rates too high, sending the economy into a recession and financial markets into a slump.

The last time the US economy fell into a recession was in 2020 when it contracted 3.5 per cent due to disruptions caused by the COVID-19 outbreak.

Last year, the economy grew 5.7 per cent, expanding at its fastest pace since 1984 as it rebounded aggressively from the pandemic. But inflation, as measured by the Consumer Price Index, grew at an even faster pace of 7 per cent, marking the fastest growth in four decades too.