Federal Reserve Meeting Coverage - 2021 Fed Meetings
News

May 2022 Fed Meeting — Fed Raises Federal Funds Rate by 50 Basis Points

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
How MagnifyMoney Gets Paid ?
Advertiser Disclosure
iStock

On Wednesday, the Federal Reserve Open Market Committee (FOMC) announced that it is raising the federal funds target rate by 50 basis points, lifting that range from 0.25% to 0.50% up to 0.75% to 1.00%. Until March, that rate had been set as low as possible to stimulate economic activity amidst the COVID-19 pandemic.

With inflation as a critical issue facing the U.S. economy, the Fed is tightening its monetary policy accordingly. In addition to raising the rates at which financial institutions lend money to each other to meet their cash reserve requirements, the Fed is also selling off securities it had purchased in the early stages of the pandemic to shore up financial markets.

“It’s our job to make sure that inflation of that unpleasant, high nature doesn’t get entrenched in the economy,” said Fed Chair Jerome Powell. “That’s what we’re here for, one of the main things we’re here for — perhaps the most fundamental thing we’re here for. And the way we do that is we try to get supply and demand back in sync with each other.”

What happened at the May Fed meeting

Key takeaways

  • FOMC raises federal funds target rate by 50 basis points, the largest rate increase since 2000
  • Chair Powell projects confidence in the U.S. economy as some red flags start to emerge
  • Inflation remains a key theme, as PCE reached a 6.6% year-over-year increase in March

Fed raises federal funds rate by 50 basis points

In response to the highest inflation rates in decades, the FOMC raised the federal funds rate by the highest amount since 2000.

“We are on a path to move our policy rate expeditiously to more normal levels,” said Powell. “Assuming that economic and financial conditions evolve in line with expectations, there is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings.”

The most recent projections from the FOMC as part of its March Summary of Economic Projections (SEP) included a wide range of forecasts for where the federal funds target rate could land by the end of 2022. The lowest forecast was 1.25% to 1.50%, with the highest forecast at 3.00% to 3.25%. The median forecast was 1.75% to 2.00%, which would require several more rate increases this year. The Fed’s next SEP will be released in June.

Chair Powell responds to recession worries and economic decline

For a while, the economic recovery during the pandemic had been going well: Unemployment steadily fell, real gross domestic product (GDP) rose and the stock market reached unprecedented highs. However, with the emergence of persistent, elevated inflation, there are signs that the U.S. economy is starting to falter.

In the first quarter of 2022, real GDP decreased at an annual rate of 1.4% — in large part due to the price increases during that time. (Two consecutive quarters with real GDP declines generally signals the start of a recession.) Several major stock indexes, including the NASDAQ, S&P 500 and Dow Jones Industrial Average entered correction territory during recent months as well, meaning that they lost at least 10% of their value.

Despite this, Powell argued that while “overall economic activity edged down in the first quarter … underlying momentum remains strong.” He cited temporary swings in inventories and net exports, but claimed that these “likely carry little signal for future growth,” also noting that “household spending and business fixed investment continue to expand briskly.” The labor market also remains strong, as unemployment fell to 3.6% in March, the lowest rate since the start of the pandemic.

Inflation stays elevated amid global supply issues

Even as the Fed has begun to tighten its accommodative pandemic-era monetary policies, inflation continues to rise. According to the Personal Consumption Expenditure (PCE) price index — a key metric used by the Fed to determine price stability — inflation has risen over several consecutive months. The most recent data shows that prices rose 6.6% in March 2022 relative to March 2021.

Since the start of the current inflationary trend, Powell has referenced supply-related disruptions due to the pandemic. Those disruptions are still affecting the global flow of goods, particularly as the Chinese government imposes lockdowns to curtail the spread of the coronavirus. Russia’s invasion of Ukraine is another crisis that has downstream effects on global energy markets in particular.

Powell noted that some of those dynamics are outside of the Fed’s control: “Our tools don’t really work on supply shocks; our tools work on demand. We can’t affect, really, oil prices or other commodity prices, or food prices and things like that. But there’s a job to do on demand.”

Since certain supply constraints seem unlikely to lift anytime soon, the Fed will strive to tamp down demand in order to control inflation.

Fed meeting schedule in 2022

Here is the FOMC’s calendar of scheduled meetings for 2022. Each entry is tentative until confirmed at the meeting proceeding it.

January 25-26, 2022

March 15-16, 2022

May 3-4, 2022

June 14-15, 2022

July 26-27, 2022

September 20-21, 2022

November 1-2, 2022

December 13-14, 2022

Past Fed meeting coverage

Read our analysis of the previous Fed meeting:

What Happened at the March 2022 Fed Meeting

Key takeaways

  • The FOMC raised the federal funds rate above the zero-bound rate set in March 2020 for the first time.
  • Fed’s Summary of Economic Projections included forecasts with higher short-term inflation for 2022.
  • Overall economic conditions are strong, but Russian invasion of Ukraine creates some uncertainty.

Fed begins interest rate liftoff

The most important news from the March Fed meeting was the decision to raise the federal funds rate due to inflation. “Inflation remains well above our longer-run goal of 2.0%,” said Powell. “Aggregate demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. These supply disruptions have been larger and longer lasting than anticipated.”

At the start of the COVID-19 pandemic, the Fed slashed the federal funds target rate to 0.00%-0.25% in an effort to support an economy in crisis. Now, with unemployment rates down and inflation reaching its highest level in decades, raising that rate again was appropriate. The U.S. economy is much stronger, as evidenced by real gross domestic product (GDP) growth and favorable labor market conditions, so there’s a lower risk of a recession as the Fed tightens monetary policy.

As part of the Fed’s Summary of Economic Projections (SEP), there is a dot plot that tracks meeting participants’ projections for the federal funds rate. The March dot plot shows that the federal funds target rate may hit around 2.0% by the end of 2022, according to median expectations, but there’s a lack of consensus, as evidenced by the wide range of each member’s projections.

SEP projects course of future inflation

Four times per year, the FOMC releases the SEP, which include the median, short-term economic forecasts among committee members for economic data like inflation and unemployment. The SEP is an important barometer for what experts believe the U.S. economy could look like in the short term.

The Fed’s March SEP set the median expectation for 2022 inflation at 4.3%, which is lower than the 5.8% annual increase in personal consumption expenditures (PCE) inflation in 2021. However, that inflation expectation continues a trend of upward revisions in the inflation forecast for 2022. In the December SEP, the Fed had expected a 2.6% increase in PCE inflation for 2022 (a number that was even lower at 2.2% in the prior report).

Expectations for inflation remain slightly elevated in 2023 (2.7%) and 2024 (2.3%) with the Fed targeting a long-term PCE inflation rate of 2.0%. Those projections suggest that the Fed expects its federal funds rate raises and other policies will successfully reign in the significant price increases of the last year.

Strong economy faces further challenges

While inflation was a key topic during the March FOMC meeting, Powell reiterated that the economy was still doing well overall. “Economic activity expanded at a robust 5.5% pace last year,” Powell noted, “reflecting progress on vaccinations and the reopening of the economy, fiscal and monetary policy support and the healthy financial positions of households and businesses.”

The SEP also reflected rosy expectations moving forward, particularly related to real GDP growth, which factors in the impact of inflation. Real GDP growth in 2021 was as high as it’s been in decades, and the median FOMC expectation for GDP growth in 2022 is 2.8%. Notably, that forecast is lower than what it was in December but still positive. Unemployment is also expected to run below the FOMC’s long-term target for the next few years.

However, even though the omicron variant waned after a January spike in COVID-19 cases, the economy is facing new problems due to Russia’s invasion of Ukraine, which impacts not only energy prices, but shipping supply chains and other commodity markets as well. “The economy often evolves in unexpected ways,” said Powell — a key lesson of the last few years.