Fed Delivers Biggest Rate Hike in More Than Two Decades to Curb Red-Hot Inflation
2022.05.04 21:06
By Yasin Ebrahim
Investing.com – The Federal Reserve raised interest rates on Wednesday by a half percentage point for the first time since 2000 as the fight against elevated inflation heats up.
The Federal Open Market Committee raised its benchmark rate to a range of 0.75% to 1% from 0.25% to 0.5% previously.
Ahead of the meeting, Fed Chairman Jerome Powell hinted last month that a 50 basis points increase in the Fed funds rate was on the table. The Fed chief also backed the idea of front loading more than one 50 basis-point hike at future meetings.
Market participants now expect the Fed to raise rates by 50 basis points at the next three meetings.
The need for speed on rate hikes comes as the central bank is desperate to restore price stability at a time when inflation continues to run well above the Fed’s 2% target.
The core personal consumption expenditures price index, the Fed’s preferred inflation measure, jumped to 5.2% in March.
Above-trend inflation is expected to continue as recent Covid-19 lockdowns in China have likely exacerbated supply chain problems at a time when demand remains robust.
“[W]e’re going to see longer lasting and higher than expected inflation for quite some time because of the China problem, it’s not going away in the near term,” David Wagner, portfolio manager at Aptus Capital Advisors told Investing.com in an interview on Tuesday. “They’re not going to get rid of that policy,” Wagner added, referring to China’s zero-covid policy.
As well as hiking rates, the Fed will also engage in quantitative tightening — by shrinking its nearly $9 trillion balance sheet — in the hope to further tighten financial conditions to slow economic growth and inflation.
The minutes of the Fed’s March meeting detailed that the balance reduction program would be phased-in over a three-month, or modestly longer, period.
Under the plan, the Fed would allow about $60 billion in Treasury securities and about $35 billion in agency MBS to roll off its balance sheet.
The size of the reduction at about $95 billion a month is significantly larger than the start of the previous balance sheet reduction program in 2018.
In the Fed’s previous balance sheet reduction program, the central bank permitted about $10 billion of securities a month – $6 billion a month in Treasury securities and $4 billion in mortgage-backed securities a month – to roll off its balance sheet.
As the Fed seeks to rein in accommodative monetary policy measures — that many argue have played a big role in the more decade bull run in risk assets — investors are facing a reset, or new normal, that has roiled equities so far this year.
“Investors are warming up to the reality that a lot of the bull market phase that we’re arguably coming out of was in no small way driven by the Fed liquidity,” Chief Market Strategist David Keller at StockCharts told Investing.com in an interview on Tuesday.
Traders are expected to shift attention to Fed Chairman Jerome Powell’s press conference at 2.30 PM ET, with the Fed’s plan to cut its balance sheet likely to garner the bulk of attention.
