The Fed's aggressive rate-hiking plan could harm the economy as it battles inflation.

• The Federal Reserve increased interest rates by a quarter-point on Wednesday and predicted six additional hikes for the year.
• Some economists predict that the Fed may not implement all of its rate increases due to the potential negative impact on the economy and the possibility of inflation decreasing.
• It is believed that the Fed will follow its forecast due to its determination to prevent stagflation, which involves both rising inflation and unemployment.

Can the Federal Reserve successfully combat inflation through an aggressive campaign of interest rate hikes without causing significant harm to the economy?

The Fed raised interest rates by a quarter-point on Wednesday, marking the first hike since 2018. Additionally, the Fed's forecast indicates that officials anticipate six more rate hikes this year and three next year.

The stock market experienced a sharp rise at the end of the day, reversing an initial sell-off following the central bank's forecast. The Dow Jones Industrial Average gained 518 points, or 1.5%, while the S&P 500 jumped 3.8% to 13,436. In the bond market, yields increased but later decreased, with the 10-year yield, which affects mortgages and other loans, reaching 2.19%, down from 2.24% at its peak. Yields move in the opposite direction of price.

James Paulsen, chief investment strategist at Leuthold Group, stated that today's Federal Reserve meeting is the most thoroughly anticipated meeting he has ever witnessed in his career. According to him, the stock market began reacting to this event last August.

Pauslen stated that the stock market had a "sell the news" reaction and was positioned for a rally. He pointed out that seven rate hikes were already priced into the bond market before the meeting, but many economists had predicted the Fed would only forecast five or six.

According to Paulsen, while much of the market is already factored in, the larger concern is whether we will experience a recession.

Despite economists not predicting a recession, they anticipate slower growth due to the clouded picture resulting from Russia's invasion of Ukraine. This conflict and sanctions have caused an inflation wave since Russia is a significant commodities producer, and there are concerns about the supply of oil, wheat, and other major exports.

Simona Mocuta, chief economist at State Street Global Advisors, stated that she believes the Fed is being too aggressive.

Due to the Russian invasion of Ukraine, economists have been lowering their growth projections.

The evolution of the economy is uncertain, and the Fed delivered a strong message, but I'm still skeptical we'll get all the rate hikes, said Mocuta.

The Fed was expected to sound hawkish when it delivered the first rate hike, but many saw it as behind the curve due to its initial view of inflation as transitory.

‘An inflationary shock’

The consumer price index jumped to 7.9% in February and is expected to be even higher in March. However, inflation should slow down in the second half of the year due to base effects in comparisons.

Before the Ukraine war, the policy trade-off wasn't great, but now Ukraine has made it worse. It's an inflationary shock, but the factors driving it are beyond the Fed's control, according to Mocuta.

Mocuta stated that the Fed is likely to implement the initial rate hikes, but it should reevaluate its approach to hikes and the economy in the third quarter.

If the Russia-Ukraine conflict were to improve, some pressures on inflation and supply chains would ease. Some supply chain pressures from the pandemic could also fade as the year wears on.

Drew Matus, chief market strategist at MetLife Investment Management, stated that while the signals being sent by the market indicate what is needed, whether they will actually act on it remains uncertain. He explained that this is not a demand-side story and that he does not understand how the Fed will achieve inflation through its actions, as there are supply chain and energy issues that are unrelated to the Fed.

The Fed anticipates core inflation to be 4.1% this year, decreasing to 2.6% in 2023 following rate hikes. The forecast predicts GDP growth of 4% in 2022 and 2.2% in 2023. Fed officials expect the unemployment rate to drop to 3.5% and remain stable.

"The unemployment rate staying steady presents some gaps in the logic of their forecasts, which don't make sense, as they predict inflation and growth coming down," Matus said.

If the Fed were to raise rates at the projected pace, it would not be able to achieve the economic forecast, according to Matus.

‘They’re serious’

Some Wall Street forecasts predict seven rate hikes for this year, but others expect the Fed to proceed.

Mark Cabana, head of U.S. short rate strategy at Bank of America, stated that those who believe they won't be able to execute seven hikes are in for a surprise, as they are seriously behind the curve on inflation.

Diane Swonk, the chief economist at Grant Thornton, advised that markets should trust the Fed's statement.

The Fed's decision to raise interest rates is a monumental shift in their outlook, as they now expect inflation to be hotter for longer. This shift was not just made by one person at the Fed, but was a systemic move across the entire organization. The market reaction to this decision shows that the Fed does not believe their new outlook, which is a significant change from their previous stance.

The Fed's unemployment forecast may not be accurate, but the central bank is determined to reduce inflation.

If Fed officials follow their forecast and raise interest rates seven times, the economy will slow down to an average growth rate of 1% in the second half, resulting in a semihard landing.