U.S Fed Hikes Benchmark Interest Rate
Jerome Powell, Fed Chairman

U.S Fed Hikes Benchmark Interest Rate

The United States (U.S) Federal Reserve on Wednesday raised its benchmark overnight interest rate by half a percentage point, the biggest jump in 22 years, and said it would begin trimming its bond holdings next month as a further step in the battle to lower inflation.

The latest rate hike follows a 25 basis point increase booked in the first quarter of the year. READ: U.S Fed Hikes Interest Rates 0.25% The U.S. central bank set its target federal funds rate to a range between 0.75% and 1% in a unanimous decision, with further rises in borrowing costs of; perhaps similar magnitude likely to follow.

Federal Reserve issues FOMC statement, saying: “Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain.

“The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks”.

The Committee said it seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.

With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong.

In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate.

In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that was issued in conjunction with this statement.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook.

The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.

The Committee’s assessments will take into account a wide range of information, including readings on public health, labour market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice-Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker was voted as an alternate member at this meeting.

The Fed shrugged off the surprise 1Q GDP contraction and pushed ahead with a 50bp interest rate increase and announced Quantitative Tightening (QT) as it belatedly seeks to get a grip on inflation, according to ING Economics.

Analysts said the Fed is now “highly attentive” to inflation risks and amid “robust” job gains “ongoing increases” in the Fed funds rate will be “appropriate”.

It is starting QT at $47.5 billion per month on June 1st ($30 billion Treasuries and $17.5 billion agency MBS) before getting to a “max” of $95 billion in September ($60 billion Treasuries, $35 billion agency MBS).

This is the first 50 basis points move since May 2000 and underlines the new urgency the Fed has in an environment where inflation is 8.5% and a tight labour market and surging employment costs risk making inflation much stickier than in previous cycles.

After all, oil and food prices can eventually fall. Wages and employee benefits don’t, analysts said in a commentary.

Moreover, analysts said corporate pricing power remains strong and with China’s lockdowns continuing and geopolitical tensions staying high, there seems little immediate prospect that the Fed will get any help in its fight against inflation from falling commodity, freight or component costs. #U.S Fed Hikes Benchmark Interest Rate

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