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The Fed raises rates by half a point, starting a reduction in the balance on June 1

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WASHINGTON – The Federal Reserve on Wednesday raised its overnight target by half a percentage point, the biggest jump in 22 years, and the US Federal Reserve chief urged Americans struggling with high inflation to be patient while officials take tough action. to put it under control.

As a much-anticipated move, the Fed unanimously set a target rate on federal funds ranging from 0.75% to 1%, and Fed Chairman Jerome Powell said politicians were ready to approve a half percent increase in future politically motivated meetings. in June and July.

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The level of specificity – the actual announcement of a Fed rate hike in advance – was unusual, but reflected that Powell was running a course between high inflation, which required a strong Fed response, and an attempt to avoid an overrun that could push the economy into recession.

At a news conference following the Fed’s political statement, Powell explicitly ruled out raising rates by three-quarters of a percentage point at a future meeting, a comment that sparked a stock market rally.

But he also made it clear that the rate hike, which the Fed already has in mind, “won’t be pleasant” as they force Americans to pay more for mortgages and car loans, and possibly lower asset values.

The Fed also said it would start cutting about $ 9 trillion in assets accumulated during its efforts to combat the economic consequences of the coronavirus pandemic next month as another lever to control inflation.

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“It’s very unpleasant,” Powell said of the impact on households of inflation, which is three times higher than the Fed’s 2% target. “If you’re a normal economic person, then you probably don’t have… so much extra… costs, and that immediately affects your food costs… gasoline for energy and the like. So we understand the cause of the pain. “

STABLE PRICES

Powell told reporters that he and his colleagues in the Fed are determined to restore price stability, even if it means steps that will reduce business investment and household spending and slow economic growth. The effects of getting inflation out of control, he said, were worse.

“After all, everyone is better off at stable prices,” Powell said.

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However, Powell said he feels the U.S. economy is doing well and is strong enough to withstand future rate growth without being embroiled in a recession and without even seeing significant unemployment growth.

Despite the fall in gross domestic product in the first three months of this year, “household spending and fixed capital investment remain strong. The increase in the number of jobs was reliable, ”the statement of the Federal Open Market Committee of the Central Bank reads.

Officials have increased descriptions of the risk of rising inflation, especially given factors that have emerged since the beginning of the year, including the war in Ukraine and new coronavirus blockades in China.

“The committee is very vigilant about the risk of inflation,” said the Fed on language analysts, explaining as a sign of the Fed’s commitment to raise interest rates as high as necessary to get inflation, and expectations of its further path, back to 2% target .

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BALANCE DECREASE

The statement said the Fed’s balance sheet, which rose to about $ 9 trillion when the central bank tried to protect the economy from a pandemic, would fall by $ 47.5 billion a month in June, July and August to $ 95 billion a month. month starting in September.

Politicians have not released fresh economic forecasts since this week’s meeting, but data after their last gathering in March do not provide a definitive understanding that inflation, wage growth or hiring rates have begun to slow.

U.S. stock markets jumped after the announcement, widening growth after Powell doused the idea of ​​raising rates by three-quarters of a percentage point. The S&P 500 closed about 3% higher, recording the largest one-day percentage increase in almost a year.

Yields on government bonds fell sharply in volatile trading, while the dollar weakened against a basket of currencies of major trading partners.

“It was well-proven and well-delivered,” said Simona Mokuta, chief economist at State Street Global Advisors. “There is an awareness that the economy is slowing down and there are risks involved. Depending on the scale of the move, it was very easy, and that’s good. “

(Report by Howard Schneider; additional reports by Sakib Ahmed and Chuck Nikolai in New York Editing by Paul Simoa)

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