Fed Raises Rates by 0.75% as Rampant Inflation Forces Biggest Hike Since 1994
2022.06.15 21:11
By Yasin Ebrahim
Investing.com — The Federal Reserve surprised markets on Wednesday with a larger than expected 0.75% rate increase as persistently high inflation compelled the central bank to deliver its biggest hike at a single meeting since 1994.
The Federal Open Market Committee raised its benchmark rate to a range of 1.5% to 1.25% from 0.25% to 0.5% previously. That was more hawkish than economists’ expectations for a 0.5% rate hike
In the weeks leading up to the decision, Fed Chairman Jerome Powell said he wasn’t “actively considering” a 0.75% rate increase and signaled that a 0.5% hike would be appropriate at the June and July meetings.
But several signs showing above-trend inflation could stick around for longer than feared forced the central bank to step up the pace of monetary policy tightening to prevent falling further behind in the battle against inflation.
Data last week showed that price pressures stayed red-hot in May, rising 8.6% and marking a blow to hopes that inflation was peaking.
The steeper than expected rate hike pushes the Fed closer to reaching the neutral rate – a rate that neither improves the economy nor slows it down. The Fed had previously signaled that it was eager to move “expeditiously” to a restrictive stance, above the neutral rate, to bring down demand and cool inflation.
Restoring supply and demand in the labor market is key to the central bank’s plans. A tight labor market in which there are about two jobs for every unemployed American – threatens to fuel a wage spiral that could push inflation beyond the Fed’s reach.
Some on Wall Street have suggested that job gains would have to reverse before the Fed considers taking a step back.
“No fun ’til [the] Fed [is] done… and in 2022 that requires [a] negative payroll print,” Bank of America said last week.
The era of aggressive Fed tightening has many worried that the central bank could overshoot on policy tightening, slowing the economy by too much into a recession.
Those fears have been most prevalent in the bond market, where the yield curve continues to flatten – a sign that bond traders appear to be losing confidence in the Fed’s ability to avoid a hard landing, or recession.
The Fed’s plan to shrink its nearly $9 trillion balance sheet got underway on Wednesday, as the first tranche of debt, or Treasuries securities, matured.
The quantitative tightening plan will initially allow $30 billion in Treasury securities and $17.5 billion in agency MBS to roll off its balance sheet, with the intent of gradually stepping up the pace after three months to $60 billion and $35 billion per month, respectively.
