In line with widespread expectations, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 25 basis points (bp) at its meeting on March 15-16, 2022. The new target range is 25-50 bp.
The FOMC’s press release stated: “Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
Key Takeaways
- The Federal Open Market Committee (FOMC) voted to increase the fed funds rate by 25 basis points at its meeting on March 15-16, 2022.
- It cited strong job gains, a falling unemployment rate, and “elevated” inflation as its reason.
- The FOMC sees Russia’s war on Ukraine as a key risk that may produce higher inflation and decreased economic activity.
- The FOMC expects to begin reducing its balance sheet at some unspecified future meeting.
Near-Unanimous Vote
Of the nine voting members present at the meeting, eight voted in favor of the 25 bp rate increase, including Fed Chair Jerome Powell and Vice Chair Nominee Lael Brainard. The only dissenting vote was cast by James Bullard, who favored a rate hike of 50 bp.
Key Contingencies
The FOMC’s statement noted key contingencies that may affect the future course of monetary policy. One was Russia’s war on Ukraine. The statement said: “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, 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 statement also said: “The Committee [i.e., the FOMC] would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals [i.e., maximum employment and inflation at 2% over the longer run]. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
Reducing the Fed’s Balance Sheet
The statement indicated that the FOMC will be reducing its holdings of U.S. Treasury securities, U.S. agency debt, and U.S. agency mortgage-backed securities (MBS). However, this decision will be made at an unspecified future meeting.
Implementation Note
The FOMC’s statement was accompanied by an implementation note. In addition to raising the target range for the federal funds rate by 25 bp, the FOMC voted unanimously to raise the interest paid on reserve balances to 40 bp and to increase the primary credit rate by 25 bp to 50 bp.
Regarding current balance sheet management, the implementation note instructs the Open Market Desk to: “Roll over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities (MBS) in agency MBS.”