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The Fed raises interest rates by half a percentage point – the largest increase in two decades – to fight inflation




WASHINGTON – The Federal Reserve on Wednesday raised its reference rate by half a percentage point as the most aggressive step so far in the fight against generational highs in inflation.

“Inflation is far too high and we understand the difficulties it causes, we are moving fast to bring it down again,” Fed Chairman Jerome Powell said during a news conference that he began by saying he wanted to “address it directly”[ads1];. the American people. ” He later noted the burden of inflation on people with lower incomes, saying, “we are strongly committed to restoring price stability.”

According to the chairman’s comments, this will probably mean more 50 basis point interest rate increases in the future, but nothing more aggressive than that.

Along with the movement higher in rates, the central bank indicated that it will start reducing assets on the balance sheet by 9 trillion dollars. The Fed had bought bonds to keep interest rates low and money flowing through the economy, but rising prices have necessitated a dramatic revision of monetary policy.

The markets were prepared for both moves, but have nevertheless been volatile throughout the year. Investors have relied on the Fed as an active partner to ensure that markets function well, but rising inflation has necessitated tightening.

Wednesday’s rate hike will push the federal funds rate to a range of 0.75% -1%, and current market prices will rise to 3% -3.25% by the end of the year, according to data from CME Group.

The shares rose after the announcement while government interest rates supported previous peaks.

The markets now expect the central bank to continue to raise interest rates aggressively in the coming months. Powell only said that a move of 50 basis points “should be on the table at the next couple of meetings”, but he seemed to be discounting the likelihood of the Fed becoming more aggressive.

“Seventy-five basis points is not something the committee is actively considering,” Powell said, despite market prices that had leaned sharply against the Fed increase of three quarters of a percentage point in June.

“The US economy is very strong and well positioned to handle tighter monetary policy,” he said, adding that he envisages a “soft or soft” landing for the economy despite the tightening.

The plan outlined on Wednesday will see the balance reduction in phases as the Fed will allow a limited level of maturing bond income to roll out each month, while the rest is reinvested. As of June 1, the plan will see $ 30 billion of Treasury and $ 17.5 billion in mortgage-backed securities roll off. After three months, the budget for the Treasury will increase to $ 60 billion and $ 35 billion for mortgages.

These figures were largely in line with the discussions at the last Fed meeting as described in the minutes of the session, although there were some expectations that the increase in the limits would be more gradual.

Wednesday’s statement noted that economic activity “fell in the first quarter”, but noted that “household spending and corporate fixed investment remained strong.” Inflation “remains high”, the statement said.

Finally, the statement addressed the Covid outbreak in China and the government’s attempts to address the situation.

“In addition, covid-related shutdowns in China are likely to exacerbate supply chain disruptions. The Committee is very aware of the risk of inflation,” the statement said.

“No surprises on our part,” said Collin Martin, interest rate strategist at Charles Schwab. “We are a little less aggressive on our expectations than the markets are. I think another 50 basis point increase in June seems likely. … We think inflation is close to the top. If it shows any signs of peaking and falling later this year, it gives the Fed a little leeway to slow down at such an aggressive pace. “

Although some members of the Federal Open Market Committee had pushed for larger interest rate increases, Wednesday’s move received unanimous support.

The 50 basis point increase is the largest increase in interest rates that the FOMC has introduced since May 2000. At that time, the Fed was fighting the excesses of the early dotcom era and the internet bubble. This time the circumstances are quite different.

When the pandemic crisis hit in early 2020, the Fed cut its reference rate to a range of 0% -0.25% and launched an aggressive bond-buying program that more than doubled its balance sheet to around $ 9 trillion. At the same time, Congress approved a series of bills that injected more than $ 5 trillion of financial spending into the economy.

These political moves came at a time when supply chains were clogged and demand increased. Inflation over a 12-month period rose 8.5% in March, measured by the Bureau of Labor Statistics’ consumer price index

For several months, Fed officials rejected the rise in inflation as “temporary”, and then had to reconsider that position as the pressure did not give way.

For the first time in more than three years, the FOMC approved an increase of 25 basis points in March, which indicates that the fund interest rate may rise to just 1.9% this year. Since then, however, several statements from central bankers pointed to an interest rate far north of it. Wednesday’s move marked the first time the Fed has raised interest rates at subsequent meetings since June 2006.

Shares have fallen throughout the year, with the Dow Jones Industrial Average at almost 9% and bond prices also falling sharply. The 10-year reference rate on the Treasury, which is moving in the opposite direction, was around 3% on Wednesday, a level it has not seen since the end of 2018.

When the Fed was last so aggressive with interest rate hikes, it raised the fund rate to 6.5%, but was forced to retire just seven months later. With the combination of a recession that was already underway plus the terrorist attacks of September 11, 2001, the Fed cut rapidly, eventually reducing the fund’s interest rate to as low as 1% in mid-2003.

Some economists worry that the Fed may face the same difficulty this time around – failing to trade on inflation as it rose and then tightening in the face of declining growth. GDP fell 1.4% in the first quarter, although it was held back by factors such as increasing Covid cases and a declining inventory build-up that is expected to ease throughout the year.

This is breaking news. Please check back here for updates.



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