Fed raises key rate by a half-point
The Federal Reserve intensified its fight against the worst inflation in 40 years by raising its benchmark 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 short-term 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, made up mainly of Treasury and mortgage bonds. Reducing those holdings will have the effect of further raising borrowing costs throughout the economy.
Speaking at a news conference after the Fed's latest meeting, Chair Jerome Powell took the unusual step of saying the central bank's officials understood the financial pain that high inflation is causing ordinary Americans.
But Powell stressed that the Fed is sharply raising rates for that very reason — to rein in high inflation, sustain the economy's health and ease the stress that millions of households are facing.
“Inflation is much too high,” he said, “and we understand the hardship it is causing.”
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 costs for mortgages, credit cards and auto loans 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.
At his news conference, Powell said he was confident that the economy is resilient enough to withstand higher borrowing rates. Job openings are at a record high. There are two available jobs, on average, for each unemployed person. Wages are rising at a historically rapid pace, and businesses are continuing to invest in equipment and software.
“I see a strong economy,” he said. “Nothing about it says it's close to or vulnerable to a recession.”
Powell also made clear that further large rate hikes are coming. He said that additional half-point increases in the Fed's key rate “should be on the table in the next couple of meetings” in June and July.
But he 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 (three-quarters of a point) hike is not something that the committee is actively considering,” he said — a remark that caused stock indexes to jump.
Before he spoke, the Dow Jones Industrial Average was up only modestly. By the close of trading, the Dow had soared 930 points, or 2.8% — its best singleday gain since May 2020.