Fed signals more aggressive steps planned to combat high inflation

WASHINGTON >> Federal Reserve officials are signaling that they will take an aggressive approach to fighting high inflation in the coming months — actions that will make borrowing sharply more expensive for consumers and businesses and heighten risks to the economy.

In minutes from their March policy meeting, released Wednesday, Fed officials said that half-point interest rate hikes, rather than traditional quarter-point increases, “could be appropriate” multiple times this year.

At last month's meeting, many of the Fed's policymakers favored a halfpoint increase, the minutes said, but held off then because of the uncertainties created by Russia's invasion of Ukraine. Instead, the Fed raised its key short-term rate by a quarter-point and signaled that it planned to continue raising rates well into next year.

The minutes said the Fed is also moving toward rapidly shrinking its huge $9 trillion stockpile of bonds in the coming months, a move that would contribute to higher borrowing costs. The policymakers said they would likely cut those holdings by about $95 billion a month — nearly double the pace they implemented five years ago, when they last shrank their balance sheet.

The plan to quickly draw down their bond holdings marks the latest move by Fed officials to accelerate their inflation-fighting efforts. Prices are surging at the fastest pace in four decades, and officials have expressed increasing concern about inflation.

The Fed's plans “reflect their great discomfort with the rapid pace of inflation,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.

The Fed is “increasingly worried” that consumers and businesses will start expecting price surges to persist, Bostjancic added, a trend that can itself prolong high inflation.

Many economists have said they worry the Fed has waited too long to start raising rates and could be forced to respond so aggressively as to trigger a recession. Indeed, economists at Deutsche Bank predict that the economy will tumble into a recession late next year, noting that the Fed, “finding itself now well behind the curve, has given clear signals that it is shifting to a more aggressive tightening mode.”

The stock market sold off when the minutes were released but later rebounded from its worst levels. Still, the S&P 500 index closed down nearly 1% after a sharp drop on Tuesday.

Markets now expect much steeper rate hikes this year than Fed officials had signaled as recently as their meeting in mid-March. At that meeting, the policymakers projected that their benchmark rate would remain below 2% by the end of this year and 2.8% at the end of 2023, up from its current level below 0.5%. But Wall Street now foresees the Fed's rate reaching 2.6% by year's end, with further hikes next year.

Higher Fed rates will, in turn, heighten costs for mortgages, auto loans, credit cards and corporate loans. In this way, the Fed hopes to cool economic growth and rising wages enough to tame high inflation, which has caused hardships for millions of households and poses a severe political threat to President Joe Biden.

Chair Jerome Powell opened the door two weeks ago to increasing rates by as much as a half-point. Most economists now expect the Fed to raise rates by a halfpoint at both its May and June meetings.