By Yasin Ebrahim

Investing.com — Wednesday’s Federal Reserve interest rate increase was the third in three years. They signaled seven rates increases for 2015 to keep inflation under control.

Federal Open Market Committee increased its target range from 0% to 0.25% previously to 0.25 to 0.5%. 

It was widely anticipated that interest rates would begin to rise as Federal Reserve Chairman Jerome Powell stated earlier in the month that he favors a 0.25 percent increase at March’s meeting.

As Fed members become more hawkish in December, the March rate hike is likely to be followed by several additional increases later in the year.

Now, the Fed expects its benchmark rate of 1.9 to increase.% in 2022, well above the 0.9% forecast in December, pointing to about seven 0.25% rate hikes in total for this year, the Fed’s Summary of Economic Projections showed.

Wall Street had already priced six to seven possible rate increases for the year ahead of the meeting.

Fed expects that the Federal funds rates will rise to 2.8% by 2023 from 1.6% in its previous projection. The Fed’s terminal rate for Fed funds – the rate that coincides with its mandate of full employment and stable inflation – was downgraded to 2.4% from 2.5% previously. 

The start of Fed’s rate-hike cycle hike comes as the central bank looks to step up its fight against inflation to ensure elevated price pressures don’t become entrenched.

The core personal consumption expenditures price index, the Fed’s preferred inflation measure, jumped to 5.2% in February, the biggest increase since April 1983.

Many argue that the central bank left too little time to combat inflation. Now, it is having to catch up. Too aggressively tightening into an economy which is likely to slow could result in a recession and worse, even stagflation.

These concerns are not supported by the Fed’s latest projections. Fed members have reduced their expectations for economic growth while red-hot inflation will continue.

According to the latest estimates, the economy will grow 2.8% by 2022. This is down from the previous estimate of 4%. In December, there was no change in the unemployment rate at 3.5%. Meanwhile, inflation rates are expected to rise to 4.1% from the 2.7% mark.  

Powell countered recession fears in his press conference after the statement on monetary policy.[W]I feel that the economy is strong enough to support tighter monetary policies.

For the Fed, the road to stability in price will not be easy. It has been bumped by even more headwinds since the Russia-Ukraine War. This war drove prices up further.

The Fed stated in a statement that “Russia’s invasion of Ukraine is creating tremendous economic and human hardship.” The implications of the U.S. invasion are uncertain. However, in the short term it is likely that the related events and inflation will increase inflationary pressure and impact economic activity.

“Powell clearly understands that the Fed is going to really have to focus on inflation now as it’s gotten far beyond their expectations,” Dean Smith, chief strategist and portfolio manager at FolioBeyond said in an interview with Investing.com on Tuesday.

“But this isn’t something that you can reduce in a short period … it’s going to take a while,” Smith added.

The conclusion of the March meeting also draws the curtain on the Fed’s monthly bond purchase programme, or quantitative easing programme, which played a major role in cushioning the economy from the pandemic impact.  

With the QE now in the rearview mirror, the Fed has been weighing options on how to reduce the size of its nearly $9 trillion balance sheet. Powell stated that “excellent progress was made” on a plan for shrinking the balance sheet. This could be put into effect “as soon at our next meeting in April.”

Powell stated that “the shrinkage of balance sheet… could be the equivalent of an additional rate increase.”