Federal Reserve expected to hike interest rates this week, despite Ukraine volatility

The Federal Reserve is expected to begin raising interest rates this week for the first time in three years as policymakers look to cool red-hot inflation, a move that comes at a precarious time for the U.S. economy as it confronts a continuing pandemic and a war in Europe.  

The U.S. central bank is almost certain to raise its benchmark federal funds rate by at least a quarter of a percentage point at the end of its two-day policy-setting meeting on Wednesday. Investors will also be closely watching new projections showing how fast Fed officials believe they need to raise rates this year to prevent soaring inflation from becoming entrenched. 

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In December, most officials predicted that rates would hover around 2.10% by the end of 2024.

Danielle DiMartino Booth, the CEO of Quill Intelligence and a former advisor to the Dallas Fed president, predicted a "minimum" quarter-point rate hike on Wednesday – two years after the central bank slashed rates to near zero to blunt the economic pain of the pandemic. 

"The expected rate hike on Wednesday comes at a tricky time, as we are currently facing a slowing economy teetering on the brink of a recession and rampant energy and food inflation," she said. 

The meeting comes one week after the Labor Department said the consumer price index rose 7.9% in February from the previous year, marking the fastest increase since January 1982, when inflation hit 8.4%. The CPI – which measures a bevy of goods ranging from gasoline to health care – rose 0.8% from January.  

The eye-popping reading – which marked the ninth consecutive month the gauge has been above 5% – has ramped up pressure on the Federal Reserve to tame red-hot inflation with a series of interest rate hikes this year. Raising the federal funds rate tends to create higher rates on consumer and business loans, which slows the economy by forcing them to cut back on spending. 

Fed Chairman Jerome Powell has left open the possibility of a rate hike at every meeting this year and has refused to rule out a more aggressive, half-percentage point rate hike, but said it's important to be "humble and nimble." 

Asked earlier this month whether the Fed is prepared to do whatever is needed to control inflation, even if that means hurting growth, Powell said: "I hope that history will record that the answer to your question is yes."

But the Fed must walk an economic tightrope this week as it juggles sky-inflation with the COVID-19 health crisis, including new health restrictions in major Chinese cities, and the Ukraine-Russia war. The central bankers must toe the line without inadvertently crashing the economy. 

Although Fed officials have been carefully telegraphing to the public their plans to hike rates to quell inflation, the Russian invasion of Ukraine, which has triggered a massive humanitarian crisis, has upended those plans. The conflict could force the central bank to take a more nimble approach or risk inducing a recession.  

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"The cold-eyed truth of the matter is that conditions are simply too volatile to put forward a coherent forecast at this time," said Joe Brusuelas, RSM chief economist. "Everything must be placed in a context of ‘revisions to come.’"