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Published in Finance

Fed’s first of several interest rate increases targets inflation as economy remains strong

BY Wednesday, March 16, 2022 05:51pm

The Federal Reserve made the first of what’s expected to become multiple interest rate increases this year.

The widely expected quarter-point increase in the federal funds rate today comes as inflation runs at a 40-year high and is expected to remain elevated through 2022 and amid the economic effects of the Russian invasion of Ukraine.

Paul Isely COURTESY PHOTO

The Fed’s indication that as many as seven quarter-point increases could occur this year in the federal funds rates shows that combating inflation ranks as a higher priority than ongoing economic growth, said Paul Isely, a professor of economics and associate dean for undergraduate programs at Grand Valley State University’s Seidman College of Business.

“What they signaled today is they’re going to focus more on inflation,” Isely said. “They’re really focused on inflation and they’re not very worried about the economy slowing down, so that’s going to be very interesting to see what happens there.”

Had the Russian invasion of Ukraine not occurred, Isely believes that the Federal Open Market Committee likely would have increased the federal funds rate by a half point. He estimates that the Ukraine invasion adds 2 percentage points to the inflation rate, which in February was at an annualized rate of 7.9 percent.

“They’re signaling they’re serious about inflation, but they also chose a path that wasn’t as heavy as they would have done otherwise,” Isely said. “It means that already we’re starting to see Ukraine change what’s happening.”

Nick Juhle, vice president and director of investment research at Greenleaf Trust in Kalamazoo, agreed that Wednesday’s move “tells us … that the Fed continues to view the health of the U.S. economy as strong and has grown more concerned about inflationary pressures.” 

Juhle believes “it’s reasonable to expect a 0.25-point increase at each of the next six meetings.

“Certainly, the invasion of Ukraine by Russia has the potential to have broad and significant effects, including by creating near-term inflationary pressures and diminishing growth in 2022. Commodity prices have risen and it is likely the invasion will exacerbate existing supply chain problems,” Juhle wrote in an email to MiBiz.

The Fed’s economic outlook issued with today’s interest rate increase forecasts the inflation rate to average 4.3 percent for 2022, well above the targeted 2-percent rate. Inflation then eases to a 2.7-percent rate in 2023 and 2.3 percent for 2024, according to the outlook.

Supply chain disruptions that began driving inflation higher “have been larger and longer lasting than anticipated, exacerbated by waves of the virus here and abroad, and price pressures have spread to a broader range of goods and services,” Federal Reserve Chairman Jerome Powell said. “Additionally, higher energy prices are driving up overall inflation. The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine will put additional upward pressure on near-term inflation here at home.”

Wednesday’s rate increase was widely expected and “got the process started” toward a series of hikes, said Mike Tierney, CEO of Community Bankers of Michigan.

Tierney believes higher interest rates from the historically low levels will not initially deter consumer or business borrowing. Wednesday’s increase “was what everybody expected,” Tierney said.

“It’s really how much they move and how fast they move,” he said.

Read 928 times Last modified on Friday, 18 March 2022 12:51
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