March 2022

The Fed Rate Hikes Begin

The Federal Reserve raised rates for the first time in three years and expects six more hikes this year as it tries to aggressively tamp down rising inflation.

Craig Imamura

Senior Product Strategist, Pacific Funds


Key Points

  • As expected, the Federal Open Market Committee (FOMC) increased the federal funds target rate range to 0.25% to 0.50%, a 0.25% increase.
  • Median projections from the committee members were for six more hikes in the fed funds rate in 2022, with three hikes in 2023.
  • The Fed’s first economic outlook for 2022 showed a material change in GDP and inflation, as real GDP estimates moved lower from 4% to 2.8% while Core PCE price index projections increased from 2.7% to 4.1%.
  • The committee also included language in its statement about plans to begin reducing its holdings of Treasury securities, agency debt and agency mortgage-backed securities at an upcoming meeting.

At their March meeting, Federal Open Market Committee(FOMC) members agreed to hike the fed funds rate by 0.25%, raising it to the 0.25% to 0.5% range. It was the first rate hike in three years.

Persistently high inflation made it a near certainty in the market’s eyes  the central bank would move to tighten monetary policy at this meeting. In February, the New York Fed’s Survey of Consumer Expectations projected 6% inflation over the next 12 months, an increase from 5.8% in January. Sweeping economic sanctions on Russia and energy constraints sparked by its invasion of Ukraine added fuel to the inflation fire. Accordingly, the Fed sharply raised its inflation estimates from 2.7% to 4.1%.

As for the economy, the Fed lowered estimates for GDP growth in 2022 from 4% to 2.8%, though the lower projections still remain well above the committee’s long-term estimates. The FOMC kept unemployment numbers unchanged at 3.5%, as labor-market conditions continue to support job seekers who are benefiting from a reopened economy and relaxed COVID precautions.

Below are the language changes made in the Fed’s statement from January:

Here are the committee’s March projections for GDP, unemployment, inflation, and the federal funds rate for 2022 through 2025:

The committee’s “Dot Plot” showed noticeable increases in the projections for the fed funds rate in 2022, 2023, and 2024. The chart showed 12 of 16 committee members expecting six rate hikes in 2022, and all committee members expect the benchmark rate to be above 2% by 2023. The median committee member saw nine rate hikes by 2023 and no increases in 2024. Five officials projected a fed funds rate above 3% in 2023.

After the Fed announcement, the10-year Treasury ended the day higher by 4 basis points to 2.19%; short and long rates were mixed on the day.

In Conclusion

Markets closed in positive territory on the final day of the FOMC meeting, as both the Dow Jones Industrial Average and S&P 500 Index moved higher during Fed Chair Jerome Powell’s press conference. The Dow and S&P 500 finished the day up 1.55% and 2.24%, respectively. As the committee dialed in on reigning in inflation and a potential reduction in its balance sheet, Treasury yields across the curve decreased in the 25 minutes following the Fed’s statement.

Chair Powell said the impact of the first hike will have a lag effect, as monetary policy has a delayed impact on the economy, and the results of higher rates on inflation will come over time. The approximate $9 trillion still on the Fed’s balance sheet gives credence to Chair Powell’s reaffirmation that the committee has tools in its bag to combat inflation and the Fed’s response may unfold over multiple years. This stance appeared to soothe investor concerns as risk assets moved higher. While its current balance sheet is almost two times what it was at the end of the Global Financial Crisis, the pace at which the Fed reduces its books may be difficult for investors to predict, especially since it will likely run concurrently with the Fed increasing its benchmark rate.


One basis point is equal to 0.01%.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

Personal Consumption Expenditures (PCE) refers to a measure imputed household expenditures defined for a period of time.

Quantitative Easing is a type of monetary policy in which a nation’s central bank tries to increase the liquidity in its financial system, typically by purchasing long-dated government bonds from that nation’s largest banks

Quantitative Tightening (QT) is a contractionary monetary policy applied by a central bank to decrease the amount of liquidity within the economy

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.


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