Fed Raises Rates and Projects Six More Increases in 2022

Mr. Powell said that, in his view, “the probability of a recession within the next year is not particularly elevated,” and that “all signs are that this is a strong economy and, indeed, one that will be able to flourish” with less policy help.

“The economy, we think, can handle interest rate increases,” he said.

In spite of the forecast for higher rates, stocks rose 2.2 percent on Wednesday, a possible signal that investors took heart in Mr. Powell’s insistence that the economy was strong enough to withstand the bank’s efforts to slow inflation.

The Fed’s decision to raise rates was an inflection point after two years of trying to help the economy recover from the damage inflicted by the pandemic. While the coronavirus continues to disrupt commerce around the world, the U.S. economy has recovered swiftly. America’s job market has rebounded rapidly from steep pandemic job losses, and businesses are now struggling to find workers.

A surge in consumer spending has helped to push the rate of inflation to levels not seen since the 1980s. Instead of echoing the anemic slog back from the 2007-9 recession — one that kept millions of applicants out of work and left inflation tepid despite years of rock-bottom rates — the pandemic bounce-back has been vigorous.

Judging by inflation, it may even have too much heat, which is why the Fed is trying to cool it to a more sustainable pace.

“We’ve had price stability for a very long time, and maybe come to take it for granted — but now we see the pain,” Mr. Powell said. “We’re strongly committed, as a committee, to not allowing this higher inflation to become entrenched, and to use our tools to bring inflation back down to more normal levels.”

Central bankers have plotted a more aggressive plan for controlling inflation than in December, when they last released economic projections. Officials now expect to raise rates to 2.8 percent by the end of 2023, based on the median estimate, up from 1.6 percent in their previous projections. That is high enough that, by the Fed’s own estimates, it might amount to actually tapping the brakes on the economy — not just taking a foot off the gas pedal.

“They knew their policy didn’t match the economic backdrop, and this is catch-up,” said Priya Misra, the head of global rates strategy at TD Securities.

Higher interest rates will trickle out through the markets to make mortgages, car loans and borrowing by businesses more expensive. That is expected to slow consumption and investment, reducing demand in the economy and — Fed officials hope — eventually weighing down surging prices.

Given the path ahead for interest rate increases and the way they filter through the economy, some economists said the central bank’s forecasts for strong growth and a very low unemployment rate this year and next might be optimistic.

“It’s a bit of a magical, immaculate disinflation,” said Michael Feroli, chief U.S. economist at J.P. Morgan. “Even if they’re not saying it or showing it in their forecasts, at some point you do need to slow the economy.”

Mr. Powell noted on Wednesday that inflation was “well above” the Fed’s target and that supply chain disruptions had been larger and longer lasting than officials expected. Now price increases are broadening to rent and other services, and high gas prices could keep costs elevated, he noted.

The Fed’s quarterly economic projections, released alongside the rate decision, showed that officials expected inflation to be 4.3 percent by the end of 2022. While that is less than the 6.1 percent increase in the 12 months through January, it is more than double the Fed’s goal of 2 percent.

The Fed aims for maximum employment in addition to price stability, and many signs suggest it is achieving that goal. Unemployment has dropped sharply, job openings are plentiful, and there are too few workers to go around. A booming job market has helped to push wage growth higher as employers compete for workers and try to retain employees by paying more.

But that, too, could risk fueling inflation. Higher pay gives workers more to spend, and it leaves companies trying to cover climbing labor costs. From a price stability standpoint, Mr. Powell said, recent wage growth has not been sustainable.

There is a “misalignment of demand and supply, particularly in the labor market, and that is leading to wages moving up in ways that are not consistent with 2 percent inflation over time,” he said.

As signs of bubbling price pressures abound, some Fed officials have become nervous. James Bullard, the president of the Federal Reserve Bank of St. Louis, voted against the committee’s decision because he favored a larger interest rate increase of half a percentage point.

Mr. Bullard and some other Fed officials have argued that moving rates up more quickly at first would show that the central bank was prepared to beat back rapid price increases.

But Mr. Powell made clear on Wednesday that, even if it is raising rates steadily instead of adjusting them briskly at first, the Fed’s policy committee knows it needs to act to restore price stability.

“We’re not going to let high inflation become entrenched,” Mr. Powell said.

The Fed is changing policy at a fragile moment. Russia’s invasion of Ukraine has raised obstacles to steady economic growth around the world, even as it has sent oil and gas prices higher and threatened to perpetuate tangled supply chains and high inflation.

“The implications for the U.S. economy are highly uncertain,” the Federal Open Market Committee said in its statement Wednesday. “But in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

The central bank does not want to stoke uncertainty at a geopolitically fraught moment, and Mr. Powell went out of his way to lay out its plans clearly. While he did not commit to a quarter-point rate increase at each meeting, he noted that many officials expect the same number of rate moves as there are meetings left in 2022, including this week’s — a total of seven.

Markets are also carefully watching to see when the Fed will begin to shrink its nearly $9 trillion balance sheet of bond holdings, a policy move that could push up longer-term interest rates. Mr. Powell made clear that a plan could come as soon as the Fed’s May meeting and that it will look much like the one the bank used when it shrank its balance sheet from 2017 to 2019, albeit sooner and faster.

As the Fed acts to control inflation, the impact is likely to be palpable. Mortgage rates have already climbed as the central bank has signaled its coming policy changes.

Steeper borrowing costs are likely to weigh on hiring, to slow wage growth and to keep asset prices — including those for stocks and homes — from rising as much as they draw buyers and investors away.

A recession is a possibility any time the Fed raises interest rates, but allowing inflation to rise unchecked could also be a risk. Already, retail sales data on Wednesday offered an early hint that higher prices may be making it harder for some consumers to afford things. Households are sitting on big savings amassed during the pandemic, which could help them to sustain spending in the months ahead, but rapid price increases could eventually eat into those stockpiles.

“High inflation takes a toll on everyone, but really, especially, on people who use most of their income to buy essentials like food, housing, and transportation,” Mr. Powell said.

Economists have said a repeat of the painful early 1980s, when the Fed caused a deep recession as it battled inflation, is unlikely. But many have warned that a gentle, easy end to the current inflationary burst is not assured.

“It is way too soon to say it’s a pipe dream; it’s been a crazy year,” Jason Furman, an economist at Harvard University, said earlier this week of the possibility of a soft landing. “It feels, with every passing month, increasingly unlikely.”