Target rate of federal funds
federal funds
target rate
Target rate of federal funds
federal funds
target rate
federal funds
target rate
The Federal Reserve raised interest rates by half a percentage point and announced a plan to reduce its massive bond holdings, crucial measures aimed at curbing the fastest inflation in four decades.
Wednesday’s move marked the Fed’s biggest rate hike since 2000, and Chair Jerome H. Powell signaled at a news conference after the meeting that further hikes of half a percentage point will be “on the table” at upcoming Fed meetings .
By shrinking its nearly $9 trillion balance sheet while raising interest rates significantly, the Fed is on course to rapidly withdraw support from the economy. The twin policies are likely to bounce through markets and the economy as borrowing money becomes more expensive.
The quick retreat is a sign the central bank is serious about slowing the economy and jobs as rapid inflation continues and officials grow nervous it could become more permanent. For months, prices have been rising faster than they have in 40 years.
“Inflation is way too high and we understand the difficulties it’s causing and we’re making quick efforts to bring it back down,” Powell said at his Wednesday news briefing.
“The committee believes that further increases of 50 basis points should be on the table at the next meetings,” he later added.
Policymakers spent much of 2021 hoping that inflation would ease on its own as supply constraints eased and the economy stabilized after early pandemic disruptions. But normalcy has yet to return, and inflation has only accelerated. Now new pandemic-related lockdowns in China and the war in Ukraine continue to push up the prices of goods, food and fuel. At the same time, labor is tight and wages are rising rapidly in the United States, leading to higher prices for services as consumer demand remains strong.
The “lockdowns in China are likely to exacerbate supply chain disruptions,” and the invasion of Ukraine “and related events are generating additional upward pressure on inflation and are likely to weigh on economic activity,” according to the Federal Open Market Committee’s May statement .
As shocks continue to pound global supply, Fed officials have decided they no longer have the luxury of waiting for inflation to moderate on its own. Still, Mr. Powell has dismissed the idea of more aggressive rate hikes. While some officials had signaled a 0.75 percentage point move could be a possibility, Mr Powell said on Wednesday that such a large hike “is not something the committee is actively considering”.
Wall Street stocks rallied after Mr. Powell’s comments, which reassured investors who had begun to worry that the fight against inflation could push the economy into recession. The S&P 500 was up more than 2.3 percent in afternoon trade.
“Market watchers began to believe last week that a 75 basis point hike was a possibility, even though it was remote,” said Emily Bowersock Hill, chief executive of Bowersock Capital Partners, a financial management firm. The “euphoria” in stock markets on Wednesday, Ms Bowersock Hill said, also reflected the fact that the Fed had said nothing that investors hadn’t already expected.
Deciding how quickly to remove political support is a difficult task. Central bankers are hoping to act with enough determination to stem the fall in prices without curbing growth so aggressively that the economy is plunged into a painful recession. But designing a so-called soft landing might be a challenge.
Mr. Powell nodded to that balancing act, saying, “I expect this is going to be a big challenge, it’s not going to be easy.” But he said, “I think we have a good chance of getting a soft or soft” landing to have.
He later noted in the press conference that he believes the Fed has “a good chance of restoring price stability without a recession.”
The Fed plans to trim its balance sheet starting in June by allowing securities to mature without reinvestment. It said on Wednesday that it would phase out up to $60 billion in government debt each month, along with $35 billion in mortgage-backed debt. This plan will be fully rolled out starting in September.
The Fed’s plan to reduce holdings is likely to take some of the steam off financial markets and could help cool the housing market by raising longer-term borrowing costs and amplifying the impact of central bank rate hikes. The anticipated moves by the Fed have already started to push up mortgage rates.
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