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The Fed raises rates by half a point


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The Federal Reserve has raised interest rates the biggest step since 2000 and has decided to start cutting its big balance sheet by deploying the most aggressive tightening of monetary policy in decades to control rising inflation.

On May 4, the U.S. Federal Open Market Committee, which is developing the policy, unanimously voted to raise the benchmark rate by one and a half percent. The Fed will begin to reduce its stock of Treasury bonds and mortgage-backed securities in June with an initial combined monthly rate of $ 47.5 billion, increasing in three months to $ 95 billion.

“The committee is very careful about the risk of inflation,” the Fed said in a statement, citing a COVID-related blockade in China that “may exacerbate supply chain disruptions.” This is in addition to Russia’s invasion of Ukraine and related events, which “create additional pressure on inflation and are likely to affect economic activity.”

The FOMC’s targeted rate on federal funds to a range of 0.75% to 1% came after a quarter-point increase in March that ended two years of near-zero rates to help depreciate the U.S. economy from the initial blow from COVID-19.

Politicians who have widely announced their intention to step up rates have been trying to contain the highest inflation since the early 1980s, when then-chairman Paul Walker raised rates sharply and shattered the economy. They hope that this time the combination of higher borrowing costs and reduced balance will lead to a soft landing, which will avoid a recession and lower inflation.

The Fed’s personal consumer price index rose 6.6 percent in the year to March, more than three times the central bank’s target – and more and more critics say the central bank has waited too long to quell inflation without causing a recession. Powell himself even told Congress in early March, “Lately he says we should have moved earlier.”

Investors are increasingly betting that at its next meeting in June, the FOMC will opt for an even bigger rate increase of three-quarters of a percentage point, making it the largest rate increase since 1994. In recent weeks, several officials have expressed a desire to “quickly” raise the rate of federal funds to about 2.5% by the end of the year, and this level they consider about “neutral” for the US economy.

The statement reiterated the previous wording, which said: “with the appropriate firm position of monetary policy, the committee expects that inflation will return to its target of 2%, and the labor market will remain strong.” He also reiterated that the Fed “predicts that a steady increase in the target range will be appropriate.”

Officials have decided to start reducing the Fed’s balance sheet by $ 8.9 trillion, starting June 1, at a rate of $ 30 billion in treasury bonds and $ 17.5 billion in mortgage-backed securities per month, rising in three months to $ 60 billion and $ 35 billion. dollars respectively. The balance sheet increased when the Fed aggressively bought securities to calm panic in financial markets and keep borrowing costs low as the pandemic spread.

The Fed said on May 4 that “to ensure a smooth transition, the committee intends to slow down and then stop the decline in the size of the balance sheet if the balance of reserves is slightly above the level, which, in his opinion, corresponds to large reserves.”

Fed Chairman Jerome Powell told Congress in early March that the process would take about three years, with a reduction of about $ 3 trillion.

Market expectations regarding a number of interest rate hikes have already boosted borrowing costs and have begun to restrain demand in rate-sensitive areas such as the housing market. Yields on benchmark 10-year Treasury bonds rose to 3% this week for the first time since 2018.

Powell and his colleagues increasingly sought to link high inflation to strength in the U.S. job market. The U.S. unemployment rate in March was 3.6%, slightly above the pre-pandemic level. The Ministry of Labor will publish figures for April 6.

Officials also need to calibrate the effects of the Russian invasion of Ukraine, which has pushed up energy and food prices, even as the COVID blockade in China adds new strain to supply chains and risks to declining global growth.

—With the help of Christy Schaeuble.

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