US Federal Reserve raises interest rates for first time since 2018 | US economy

The Federal Reserve raised interest rates for the first time since 2018 on Wednesday as the central bank struggles with soaring US inflation, the impact of the war in Ukraine and the coronavirus crisis.

The Fed raised rates by a quarter percentage point from near zero in what is expected to be the first in a series of raises in the coming months.

In a statement the Fed said economic indicators and employment figures had “continued to strengthen” but noted that inflation remained elevated and the invasion of Ukraine was not only “causing tremendous human and economic hardship” but was “likely to create additional upward pressure on inflation and weigh on economic activity” in the US.

The Fed has a dual mandate – to maximize employment and keep prices under control. The job market and the wider economy have made an impressive recovery from the lows of the pandemic, thanks in part to Fed rate cuts and a massive stimulus program, but prices have increased by 7.9% in the year through February – the highest rate of inflation in 40 years.

Supply chain issues have led to sharp increases in a variety of areas including used cars, food and utilities that are causing particular hardship for lower-income Americans.

The Fed initially dismissed rising prices as “transitory”, but has since acknowledged high inflation is likely to be around for some time. Supply problems that appeared to be normalizing earlier this year are also now feeling the impact of the war in Ukraine and face further setbacks as China imposes new lockdowns to curb new coronavirus outbreaks.

Raising rates too quickly threatens to push the US into recession. This week, CNBC’s Fed Survey – which gauges the opinions of fund managers, strategists and economists – put the probability of recession in the US at 33% in the next 12 months, up 10 percentage points from the 1 February survey. The latest survey put the chance of a recession in Europe at 50%.

With inflation running at close to four times the Fed’s target rate of 2%, Powell has made clear that the central bank will raise rates in an attempt to curb rising prices. But some economists question how much impact the Fed can have on such a complex issue.

JW Mason, associate professor of economics at John Jay College, said a quarter-point rate rise was unlikely to have much impact on inflation or the wider economy. “It is a strange feature of the way we think and talk about economics today that we have given this wildly outsized importance to this one policy tool used by this one part of government,” he said.

Mason said he expected inflation would ease without the Fed’s intervention over the next year – albeit “less than we hoped it would”. He pointed out that car prices – until recently the largest source of inflation – were already falling. While he said a series of small rate rises were not likely to have a major impact overall “a sufficiently large rise in interest rates will have a substantial negative effect on real economic activity”.

Mason said other branches of government were better able to deal with price issues in the broader economy, such as soaring rents and home prices or gas and utility bills, and that tools such as price caps or stimulus cheques could be used to alleviate hardship.

Testifying to Congress early this month, the Fed chair, Jerome Powell, made clear the central bank was prepared to raise rates in larger half-percentage-point increments should price increases fail to slow.

But he also acknowledged the economic outlook had been made more complicated by the war in Ukraine.

The conflict “is a gamechanger and will be with us for a very long time”, Powell told the House of Representatives financial services committee. “There are events yet to come … and we don’t know what the real effect on the US economy will be. We don’t know whether those effects will be quite lasting or not.”