Fed Says More Interest Rate Hikes Are Coming

FILE PHOTO: U.S. Federal Reserve Chair Jerome Powell addresses an online news conference in Washington
U.S. Federal Reserve
By Yuval Rosenberg

A busy Wednesday. Let's dive right in.

Fed Raises Interest Rates 0.25%, Signals Six More Hikes This Year

The Federal Reserve on Wednesday raised its benchmark short-term interest rate for the first time since 2018, lifting its target for the federal funds rate by 25 basis points to 0.25% to 0.5%.

The central bank’s rate-setting committee also indicated that it expects to raise rates six more times this year, bringing the benchmark rate to just below 2%, as officials look to fight inflation that has reached a four-decade high.

“The economy is very strong and against the backdrop of an extremely tight labor market and high inflation, the committee anticipates that ongoing increases in the target range for the federal funds rate will be appropriate,” Fed Chair Jerome Powell said.

The bank will also start reducing its balance sheet, further reducing monetary support for the economy, Powell said.

The moves are part of an effort to cool an economy struck by an inflationary trend that has been more severe and persistent than policymakers predicted. Interest rates have been near zero since the Covid-19 pandemic took hold in March 2020.

Expecting more inflation, less growth: The Federal Open Market Committee said in a statement that inflation is expected to persist in the short run, while fading in the second half of the year. “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 FOMC said.

In a new set of projections, the Fed’s median estimates for year-end consumer inflation rose from 2.6% to 4.3%, while its projections for economic growth fell from 4% to 2.8%. But the long-term target for inflation is still in sight, the bank said. “With appropriate firming in the stance of monetary policy, the committee expects inflation to return to its 2 percent objective and the labor market to remain strong.”

At the same time, Powell indicated that he’s not particularly worried about a recession, despite the tightening conditions. “In my view the probability of a recession within the next year is not particularly elevated,” he said. “All signs are that this is a strong economy, indeed, one that will be able to flourish — not to say withstand, but certainly flourish, as well — in the face of less accommodative monetary policy.”

Ignoring the hawks? The Fed’s decision to raise rates by a quarter of a point was widely expected, though there were inflation hawks calling for larger increases, now and throughout the year. The vote on the rate hike was 8-1 in favor, with noted inflation hawk James Bullard, chair of the St. Louis Fed, voting no as he pressed for a larger increase.

Former Treasury Secretary Larry Summers has also called for a more aggressive response to inflation, and in an op-ed piece at The Washington Post urged the Fed to take more dramatic steps. “I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely,” Summers wrote. “The Fed’s current policy trajectory is likely to lead to stagflation, with average unemployment and inflation both averaging over 5 percent over the next few years — and ultimately to a major recession.”

Powell ignored those calls, however, to the relief of some more dovish analysts. “The flaw in Summers’s analysis is that the current inflation is not the result of ordinary demand overheating, much less wage pressures. We have had a series of supply shocks, compounded by a war,” wrote Robert Kuttner of The American Prospect. “Artificially engineering a recession will not cure these extraneous factors.”

Why it matters: The Fed signaled Wednesday that fighting inflation — gradually — is now its main focus, and it will do what it takes to prevent price increases from persisting over the long term. In terms of the fiscal outlook, a campaign of rate hikes could have serious implications, driving up the cost of the $30 trillion national debt.

The bottom line: Powell expressed confidence that inflation can be brought under control without bringing economic growth to a halt, achieving a “soft landing” in what has proved to be a difficult environment. But there’s still a tremendous debate about whether the Fed is acting aggressively enough — or whether it can steer clear of provoking a painful recession.

Biden Announces Another $800 Million in Military Aid to Ukraine

President Joe Biden said Wednesday that the United States will provide an additional $800 million in military aid to Ukraine, including anti-aircraft and anti-armor systems, drones and a range of other weapons.

The announcement came hours after Ukrainian President Volodymyr Zelensky addressed members of Congress via video, delivering an urgent and emotional plea for more help against the onslaught launched by Russian President Vladimir Putin.

“I call on you to do more,” Zelensky said, asking again for a no-fly zone to be established over Ukraine to protect against Russian aerial attacks. Zelensky ended his speech by addressing remarks to Biden in English: “You are the leader of your great nation. I wish you to be the leader of the world. Being the leader of the world means to be the leader of peace.”

Biden said he watched Zelensky’s speech from the White House residence and called it “convincing” and “significant.” Still, Biden and other U.S. officials have resisted establishing the no-fly zone, fearing an escalation that could lead to U.S. troops in direct combat against Russian forces.

Biden’s announcement of additional aid raises the total committed to Ukraine to $1 billion over the past week, and $2 billion since the president took office.

"I want to be honest with you: This could be a long and difficult battle," Biden said. "We are united in our abhorrence of Putin's depraved onslaught, and we’re going to continue to have their backs as they fight for their freedom, their democracy, their very survival. And we’re going to give Ukraine the arms to fight and defend themselves through all the difficult days ahead.”

The new $800 million in funding will come from the $13.6 billion in military and humanitarian aid Congress appropriated last week. The White House said the new assistance includes:

• 800 Stinger anti-aircraft systems;

• 2,000 Javelin, 1,000 light anti-armor weapons, and 6,000 AT-4 anti-armor systems;

• 100 Tactical Unmanned Aerial Systems;

• 100 grenade launchers, 5,000 rifles, 1,000 pistols, 400 machine guns, and 400 shotguns;

• Over 20 million rounds of small arms ammunition and grenade launcher and mortar rounds;

• 25,000 sets of body armor; and

• 25,000 helmets.

Biden said more aid would be coming in the days and weeks ahead.

Medicare Advantage Cost the US $12 Billion Extra in 2020: Watchdog

Medicare Advantage is costing the U.S. government billions more compared to standard Medicare, according to a new report from a nonpartisan watchdog group.

The Medicare Payment Advisory Commission (MedPAC), an independent congressional agency established in 1997, said in a report released Tuesday that the U.S. made about $12 billion in “excess payments” to private insurers in 2020 for health care delivered through Medicare Advantage, compared to what it would have cost to deliver the same care under standard Medicare.

Medicare Advantage, which has grown significantly over the last 20 years and now covers about 40% of all Medicare participants, allows seniors to purchase private health insurance plans with additional features not included in standard Medicare, such as dental and vision coverage. Major insurers including UnitedHealth, Humana and Aetna are competing to offer plans in the program, but critics have raised concerns about rapidly rising costs.

MedPAC has been warning about the excess costs in the Medicare Advantage system for years. Here’s a summary of what’s driving costs higher from the latest report:

“The Commission has found that payments to MA [Medicare Advantage] plans are inflated as a result of plans maximizing the diagnoses they report for their enrollees in order to gain higher payments, while the underlying risk adjustment model relies on diagnoses collected from claims from fee-for-service (FFS) providers, who lack the same incentives to code diagnoses. MA plans also receive quality bonuses that increase Medicare spending for the majority of MA enrollees, yet the MA quality rating system does not provide meaningful information about plans’ quality of care. MA spending is also driven up by plan benchmarks that are set so high that the Medicare program ends up subsidizing the substantial extra benefits that MA plans offer to their enrollees—benefits that are not available to FFS enrollees.”

With Medicare Advantage expected to cover about half of all Medicare participants by next year, MedPAC says it’s time to start reeling in costs. Medicare Advantage plans “need to face appropriate financial pressure,” the group says, bringing it in line with providers of health care services in the standard Medicare program. “These policy flaws diminish the integrity of the program and generate waste from beneficiary premiums and taxpayer funds.”

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