The U.S. central bank on Wednesday raised its benchmark interest rate by 0.50 percentage point, the biggest increase in 22 years, and said it will begin reducing its bond portfolio next month as a step in the battle to reduce inflation.
The Federal Reserve has set its base rate target to a range between 0.75% and 1% in a unanimous decision, with further increases in borrowing costs of perhaps similar magnitude likely ahead.
Despite the drop in GDP (Gross Domestic Product) in the first three months of the year, “household spending and business fixed investment remain strong. Employment gains have been robust,” the Federal Open Market Committee said in a statement to the end of a two-day monetary policy meeting in Washington.
Inflation “remains high” as the Ukraine War and new coronavirus lockdowns in China threaten to keep the pressure high.
“The Committee is highly attentive to the risks of inflation,” he added.
The statement said the Fed’s balance sheet, which jumped to about $9 trillion as the central bank tried to protect the economy from the Covid-19 pandemic, could fall by $47.5 billion. (R$ 238.2 billion) per month in June, July and August, and the reduction will advance to up to US$ 95 billion (R$ 476.5) per month in September.
Fed officials did not release new economic forecasts after this week’s meeting, but data since the last meeting in March gave little sign that inflation, wage growth or a rapid pace of hiring had begun to slow.
US stock markets rose after the announcement, while government bond yields changed little. The dollar weakened modestly against a basket of currencies of major trading partners.
Interest rate futures continued to reflect bets that the Fed will raise rates to the 3% to 3.25% range by the end of the year, according to CME Group’s FedWatch tool, a pace that would include several adjustments of 0.50 percentage point or more to the rate.
“The Fed has also signaled an aggressive trajectory of further interest rate hikes, reiterating its recently stated desire to raise rates to their neutral level as soon as possible,” said Michael Brown, head of market intelligence at Caxton in London.
“However, given the significant amount of highs already priced into the market, the bar for a ‘hawkish’ surprise has always been high.”
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
