Federal Reserve chief Jerome Powell eased some concerns about an impending economic recession after rejecting the possibility of an even bigger rate hike than the US Federal Reserve announced on Wednesday.
Bond yields fell and equities registered their best day since 2020 after Powell helped calm investors, who were worried that the Fed̵[ads1]7;s aggressive tightening of monetary policy to curb the hottest 40-year inflation could tip the economy into a recession.
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In remarks after the Federal Open Market Committee voted to raise the key interest rate by 50 basis points for the first time since 2000, Powell rejected any proposal that a mega increase of 75 basis points be on the table at future meetings. The S&P 500 rose 3% after his comments, the biggest jump since May 2020.
“An increase of 75 basis points is not something the committee is actively considering,” Powell told reporters at the news conference after the meeting.
His comments came after decision-makers unanimously voted to raise the reference rate by half a point to a range between 0.75% and 1.0%, the highest since the pandemic began two years ago, as they try to curb consumer demand to reduce sky-high prices. .
The Fed also announced that it would begin reducing its massive $ 9 trillion balance sheet, which nearly doubled in size during the pandemic when the central bank bought mortgage-backed securities and other treasuries to keep loans cheap. In a plan outlined on Wednesday, the Fed indicated that it would begin settling its balance sheet on June 1 with an initial combined monthly rate of $ 47.5 billion, a move that would further tighten credit to US households. It will increase the runoff rate to $ 95 billion over three months.
Together, the steps mark the most aggressive tightening of monetary policy in decades, as the Fed tries to catch up with inflation, which reached a new 40-year high in March.
“Inflation is far too high,” Powell told reporters at a news conference after the meeting. “We understand the difficulties it causes, and we are moving fast to bring it back down. We have both the tools we need and the determination it will take to restore price stability on behalf of American families and businesses.”
Although the movements were widely expected, investors were concerned that Powell could telegraph to the markets even sharper interest rate hikes at upcoming meetings as it runs after inflation. Bank of America, Deutsche Bank and Fannie Mae were among the Wall Street firms that predicted a recession in the next two years before the meeting began this week.
Powell acknowledged that there could be some “pain” in reducing inflation and curbing demand, but pushed back against the notion of an impending recession, identifying the labor market and strong spending as bright spots in the economy.
“It’s a strong economy,” he said. “Nothing about it suggests it is near or vulnerable to a recession.”
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Still, there are no guarantees, and economists have said the Fed is facing a difficult path forward as it tries to fine-tune the needle between cooling demand and devastating economic growth.
“[Powell] set an optimistic tone regarding the plan to raise interest rates, reduce vacancies and keep unemployment relatively low, “said Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance.” However, it will be very challenging to do and we are less happy about The Fed’s ability to achieve this “soft landing”, while acknowledging that they must try. “