Fed hikes rates by half point, biggest hike in 22 years
THE Federal Reserve on Wednesday raised its benchmark overnight interest rate by half a percentage point, the biggest jump in 22 years, and said it would begin trimming its bond holdings next month as a further step in the battle to lower inflation.
The US central bank set its target federal funds rate to a range between 0.75 percent and 1 percent in a unanimous decision, with further rises in borrowing costs of perhaps similar magnitude likely to follow.
Despite a drop in gross domestic product over the first three months of this year, “household spending and business fixed investment remain strong. Job gains have been robust,” the rate-setting Federal Open Market Committee said in a statement following the end of a two-day policy meeting in Washington.
Inflation “remains elevated” with the war in Ukraine and new coronavirus lockdowns in China threatening to keep pressure high, it said. “The Committee is highly attentive to inflation risks.”
The statement said the Fed’s balance sheet, which soared to about 9 trillion as the central bank tried to shelter the economy from the COVID-19 pandemic, would be allowed to decline by
47.5 billion per month in June, July and August and the reduction would increase to as much as 95 billion per month in September.
The Fed raised rates by half a percentage point Wednesday and will most likely do it again at the next couple of meetings, but it isn’t ready to go beyond that, Fed Chairman Jerome Powell said at his press conference.
“A 75 basis point increase is not something the committee is actively considering,” he said.
Powell also said he doesn’t see a recession as something automatically following monetary policy tightening, noting “we have a good chance to have a soft or softish landing.”
He said that households and businesses look like they are in good shape, adding, “The economy is strong and is well-positioned to handle tighter monetary policy. But I’ll say I do expect that this will be very challenging, it is not going to be easy.”
Policymakers did not issue fresh economic projections after this week’s meeting, but data since their last gathering in March have given little sense that inflation, wage growth, or a torrid pace of hiring had begun to slow.
US stock markets moved higher after the announcement, while yields on government bonds were little changed. The dollar weakened modestly against a basket of major trading partners’ currencies.
Interest rate futures continued to reflect bets the Fed will raise its policy rate to the 3 percent -to-3.25 percent range by the end of the year, according to CME Group’s FedWatch tool, a pace that would include several half-percentage-point, or bigger, rate hikes to achieve.
The Fed “also signaled an aggressive path of further rate hikes, reiterating the recently stated desire to raise rates to their neutral level as soon as possible,” said Michael Brown, head of market intelligence for Caxton in London. “However, given the significant amount of hikes already priced into the market ... the bar for a hawkish surprise was always a high one.”
The Fed hikes rates to curb borrowing, cool off an overheated economy and fend off inflation spikes. It lowers them to spur borrowing, economic activity and job growth.
Early in the pandemic, amid unprecedented business closures and layoffs, the Fed slashed its federal funds rate to zero and launched massive bond purchases to lower long-term rates.
Now, however, the Fed is combatting sky-high inflation even as growth is slowing from last year’s robust 5.7 percent pace. That marked a 37-year high as vaccinations increased and the economy reopened.
The unusual dynamic is stoking worries that rapid Fed rate hikes could tip the economy into recession.