The US Federal Reserve raises interest rates by half a percentage point, the largest increase in 22 years

The Federal Reserve raised its benchmark interest rate by half a percentage point on Wednesday, the most aggressive step ever taken in its battle against rising inflation.

Along with rising prices, the central bank has indicated that it will begin reducing the holdings of assets on its balance sheet by $ 9 trillion. The Fed was buying bonds to keep interest rates and the flow of money in the economy low, but the rise in rates necessitated a dramatic rethink of monetary policy.

The Fed said the closures linked to COVID-19 in China could exacerbate supply chain problems, as well as the Russian invasion of Ukraine causing enormous humanitarian and economic hardship.

“Inflation remains high, reflecting supply and demand imbalances associated with the pandemic, rising energy prices and wider price pressures.”

The US central bank predicted that inflation would return to the target level of 2% and that the labor market would remain solid with an appropriate tightening of monetary policy.

The US central bank will begin reducing its balance sheet on June 1, starting with a cut of $ 47.5 billion a month, and rising to $ 95 billion a month after three months.

The plan outlined on Wednesday will see the budget cut in multiple stages, with the Fed allowing a certain level of bond yields in expires each month by reinvesting the rest.

Numbers in in line with the discussions of the last Federal Reserve meeting.

The markets were prepared for the Fed’s decisions, but were nonetheless volatile throughout the year. Investors have relied on the Fed as an active partner to make sure markets are doing well, but rising inflation has required tightening.

Markets now expect the central bank to continue rising in interest rates aggressively over the next few months, likely to rise by 75bps in schedule for June. Wednesday’s rate hike will push the federal funds rate in a range of 0.75% -1% and the current market rate will increase the rate to 3% -3.25% by the end of the year, according to data from the CME group.

A statement on Wednesday indicated that economic activity “declined in the first quarter” but that “household spending and fixed investment in businesses remained strong.” The statement states that inflation “remains high”.

The statement addressed the COVID-19 outbreak in China and the government’s attempts to address the situation.

In addition, the coronavirus-related arrest is likely in China will exacerbate supply chain disruptions. The statement said the committee is very keen to address inflation risks.

Although some FOMC members pushed for a further rate hike, Wednesday’s decision received unanimous support.

The 50 basis point hike is the Federal Reserve’s largest since May 2000. At the time, the Fed was battling what was known as the Internet bubble. This time around, the circumstances are a bit different.

With the outbreak of the pandemic in early 2020, the Fed reduced its key exchange rate to a range of 0% to 0.25% and instituted a rigorous bond buying program that more than doubled. its balance sheet at around $ 9 trillion. At the same time, Congress passed a series of laws that injected more than $ 5 trillion in fiscal spending into the economy.

These political moves have arrived in one moment in supply chains were clogged and demand soared. The 12-month inflation rate rose 8.5% in March, according to the consumer price index published by the Bureau of Labor Statistics.

Federal Reserve officials for months dismissed the rise in inflation as “temporary” and then had to rethink the situation as the pressures did not abate.

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