Yahoo Finance's Brian Cheung details the Fed's latest decision regarding interest rate hikes, economic uncertainty amid Chinese slowdowns and the Russian invasion of Ukraine, projections for the Fed's 2022 rate hikes, and outlook on the Fed balance sheet.

Video Transcript

BRAD SMITH: And right on cue here, the Federal Open Market Committee announcing the latest policy decision. Let's get over to Yahoo Finance's Brian Cheung with the statement details. Brian.

BRIAN CHEUNG: Well, folks, it is official. The Federal Reserve has raised interest rates by 25 basis points. I want to read you some of the big key words from the meeting announcement. The Federal Reserve saying that indicators of economic activity and employment have, quote, "continued to strengthen." They described job gains as strong and so that the unemployment rate has declined substantially, similar to what they had said.

But they noted that inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. And they did say that with the rising inflation, that was the reason why they had to start the process of raising interest rates. Again, this is the first interest rate increase since the pandemic began and also since 2018.

Now some interesting commentary that we got in the statement that's new, referring to the Ukraine war, I want to read you the whole excerpt. Quote, "The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the US 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."

And that's a big reason why the Federal Reserve has sharply increased their expectations for where they could see inflation going. Keep in mind that this meeting coincided with a round of summary of economic projections. This is something the Fed releases on a quarterly basis. In December, which was the last time we had gotten this release, the Fed said that inflation would clock in the year 2022 at about 2.6%.

Well, folks, obviously, inflation no longer transitory, the Fed sharply upwardly revising that projection to 4.3%. That's a big reason why the Fed is also sharply upwardly revising its expectations for where it would take interest rates later this year. And this is notable because some of the projections that we had seen headed into this meeting was that the Fed might signal four or five rate hikes over the course of this year. Seven total rate hikes is now the new projection, according to the median member of the 16-member committee here.

So again, this coming from the so-called dot plot projection. A lot of people are going to be reading into this. But again, the total projection is for seven 25 basis point increases over the course of this year. That would suggest interest rates 1.75% higher at the end of this year than they were headed into 2022. Keep in mind, after this first rate hike, that means another six throughout the remaining six meetings. So if you wanted to paste that out, that would be about one 25 basis point hike through the remainder of each of the six next meetings on this calendar.

And a little bit of palace intrigue with regards to the announcement here, it wasn't a unanimous decision. St. Louis Fed President James Bullard actually dissenting from this decision. He said in a policy statement that he would have preferred a double interest rate bump of 50 basis points in that meeting. Didn't happen-- it was only 25 basis points.

And the last point I want to make here before I promise to shut up is that the Fed did make an announcement, or rather, teed up the possible announcement of a balance sheet reduction. They said that would likely come in coming meetings. So maybe teeing up a May or perhaps a June announcement of the Fed starting to actually shrink its $9 trillion balance sheet. But again, the big headline, the Fed raising interest rates by 25 basis points this afternoon.

BRAD SMITH: Yeah, Brian, while we have you, and stick with us for a hot second, because as you mentioned, the tapering of some of those holdings reduction in the Treasury Secretary-- Treasury securities, excuse me, agency debt as well and some of the mortgage-backed securities, that upcoming at a coming meeting. What do you expect the velocity of some of that tapering to look like in the future in addendum with some of the rate policy that they're going to be moving forward with very clearly?

BRIAN CHEUNG: Yeah, well, they're shying away from the minutia of the details of a possible balance sheet, what they call a balance sheet run-off. And we have to kind of remember exactly what we're talking about here. During the depths of the pandemic, the Fed snatched up trillions of dollars in agency mortgage-backed securities and US treasuries.

The whole point is essentially to signal to the financial markets, look, we got you during this period of time. Obviously, now with inflation rampant, the Fed is trying to pull its broad support, so undoing that balance sheet policy would be allowing a lot of the trillions of dollars that it's accumulated to start to roll off of its balance sheet.

Now the pace by which they would do that is very much an unknown because there are a few ways you could do this. For example, you could just let the assets that you purchased that have a maturity date to simply just fall off the balance sheet once it hits its final maturity date. Or you could actually be more aggressive with it by actually actively selling those securities back into the open market. Now some have said this would be efficient because they can get the Fed to shrink the massive amount of intervention that it's had during the pandemic.

But then on the other hand, you have people saying, well, maybe the Fed shouldn't get into the business of trying to actively sell anything in the market because maybe they would try to get a profit off of that. So that's going to be an open policy question debate. Again, that's not for today. It appears that the Fed has advanced those discussions. But we won't actually get an announcement on how they want to go about doing that until that coming meeting that they're teasing, which, again, could be May or possibly June.

RACHELLE AKUFFO: Well, quite the start, indeed, thanks to our very own Brian Cheung there.