Fed boosts interest rate in push to tame inflation
Central bank signals further big increases after most aggressive hike in decades
WASHINGTON — The Federal Reserve intensified its fight against the worst inflation in 40 years by raising its benchmark short-term interest rate by a half-percentage point Wednesday — its most aggressive move since 2000 — and signaling further large rate hikes to come.
The increase in the Fed’s key rate raised it to a range of 0.75% to 1%, the highest point since the pandemic struck two years ago.
The Fed also announced that it will start reducing its huge $9 trillion balance sheet, which consists mainly of Treasury and mortgage bonds. Those holdings more than doubled after the pandemic recession hit as the Fed bought trillions in bonds to try to hold down long-term borrowing rates. Reducing the Fed’s holdings will have the effect of further raising loan costs throughout the economy.
All told, the Fed’s credit tightening will likely mean higher loan rates for many consumers and businesses over time, including for mortgages, credit cards and auto loans.
Speaking Wednesday, Chair Jerome Powell made clear that further large rate hikes are coming.
“There is a broad sense on the committee,” he said, referring to the Fed, “that additional (half-point) increases should be on the table in the next couple of meetings.”
But Powell also sought to downplay any speculation that the Fed might be considering a rate hike as high as three-quarters of a percentage point.
“A 75-basis-point hike is not something that the committee is actively considering,” he said — a remark that appeared to cause stock indexes to rise.
With prices for food, energy and consumer goods accelerating, the Fed’s goal is to cool spending — and economic growth — by making it more expensive for individuals and businesses to borrow. The central bank hopes that higher borrowing costs will slow spending enough to tame inflation yet not so much as to cause a recession.
It will be a delicate balancing act. The Fed has endured widespread criticism that it was too slow to start tightening credit, and many economists are skeptical that it can avoid causing a recession.
The central bank’s policymakers said
Wednesday that they are “highly attentive to inflation risks.” They also noted that Russia’s invasion of Ukraine is worsening inflation pressures by raising oil and food prices. It added that “COVID-related lockdowns in China are likely to exacerbate supply chain disruptions,” which could further boost inflation.
Inflation, according to the Fed’s preferred gauge, hit 6.6% last month, the highest point in four decades. Inflation
has been accelerated by a combination of robust consumer spending, chronic supply bottlenecks and sharply higher gas and food prices, exacerbated by Russia’s war against Ukraine.
Starting June 1, the Fed said it would allow up to $48 billion in bonds to mature without replacing them, a pace that would reach $95 billion by September. At September’s pace, its balance sheet would shrink by about $1 trillion a year.