The Fed raises the interest rate by half a percentage point, the largest increase since 2000

The Federal Reserve raised interest rates by half a percentage point and announced a plan to reduce its massive bond holdings, decisive measures aimed at containing the fastest inflation of the past four decades.

Wednesday’s move marked the Fed’s largest interest rate hike since 2000, and President Jerome H. Powell signaled in a post-meeting press conference that further hikes of half a percentage point will be “on the table” at upcoming meetings. of the Fed.

By reducing its balance sheet by nearly $ 9 trillion while substantially raising rates at the same time, the Fed has charted a course to quickly withdraw support from the economy. Twin policies are likely to rebound in markets and the economy as money becomes more expensive to borrow.

The rapid withdrawal is a sign that the central bank is taking the cooling of the economy and the labor market seriously as rapid inflation persists and officials get nervous that it could become more permanent. Prices have gone up to The fastest pace of the last 40 years for months now.

“Inflation is too high and we understand the difficulties it is causing, and we are moving quickly to bring it down,” said Mr. Powell in his press conference on Wednesday.

“There is a broad sense in the committee that further increases of 50 basis points should be on the table in the next two meetings,” he added later.

Policy makers spent much of 2021 hoping inflation would ease on its own as supply shortages moderated and the economy stabilized following the disruptions of the early pandemic. But normalcy has yet to return and inflation has only accelerated. Now, cool tied to the pandemic blockade in China and the was in Ukraine the prices of goods, food and fuel are further increasing. At the same time, workers are in short supply and The bets are increasing quickly in the United States, feeding higher prices for services as consumer demand remains strong.

“Blockages in China are likely to exacerbate supply chain disruptions” and the invasion of Ukraine “and related events are creating further upward pressure on inflation and could weigh on economic activity,” the Federal Open Market Committee Statement for May he said.

As shocks continue to affect global supply, Fed officials have decided they no longer have the luxury of waiting for inflation to moderate itself. However, Mr. Powell rejected the idea of ​​more aggressive rate hikes. While some officials had signaled that a 0.75 percentage point move might be possible, Mr. Powell said Wednesday that such a large increase “is not something the committee is actively considering.”

Shares on Wall Street rose following Powell’s remarks, which calmed investors who had begun to fear that the fight against inflation could push the economy into a recession. The S&P 500 jumped more than 2.3% in afternoon trading.

“Market watchers over the past week were starting to think that a 75bp hike was a possibility, even if it was remote,” said Emily Bowersock Hill, chief executive of Bowersock Capital Partners, a management firm. financial. The “euphoria” in the stock market on Wednesday, Ms. Bowersock Hill said, also reflected the fact that the Fed didn’t say anything that investors didn’t already expect.

Deciding how quickly to remove political support is a difficult exercise. Central bankers hope to act decisively enough to stop the price pop, without stopping growth so aggressively that it plunges the economy into a painful recession. Still designing a so-called soft landing will likely be a challenge.

Mr. Powell nodded to that balancing act, saying “I expect it will be very challenging, it won’t be easy.” But he said “I think we have a good chance of having a soft or soft landing.”

He noted later in the press conference that he believes the Fed has “a good chance of restoring price stability without a recession.”

The Fed plans to do so shrink its budget starting in June allowing the securities to mature without reinvestment. Wednesday it said it will eventually expire up to $ 60 billion of Treasury debt each month, along with $ 35 billion of mortgage-backed debt. That plan will be fully effective starting in September.

The Fed’s plan to reduce its holdings is likely to take strength from financial markets and could help cool the housing market as it raises long-term borrowing costs, reinforcing the effect of central bank interest rate hikes. The Fed’s early moves have already begun to push mortgage rates higher.