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Fed Delivers Biggest Rate Hike in More Than Two Decades to Curb Red-Hot Inflation

Economy May 04, 2022 03:44PM ET
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© Reuters.

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.  

"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," the Fed said in a statement. 

But the path of rate hikes isn't expected to become more aggressive as Powell said the committee wasn't actively considering a more steeper 75 basis points rate hike in the coming months even as 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 balance sheet reduction program is expected to get underway on June 1 at a pace of $47.5 billion per month.  "In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1," the Fed said. 

Under the plan, the Fed would initially allow about $30 billion in Treasury securities and about $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.  

The size of the reduction rising to $95 billion a month after three months is significantly larger than the start of the previous balance sheet reduction program in the all of 2017.

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.

Fed Delivers Biggest Rate Hike in More Than Two Decades to Curb Red-Hot Inflation
 

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Comments (44)
Sharon Neo
Sharon Neo May 05, 2022 2:56PM ET
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Expert wray Thomas cooper jr strategies works like magic I don't actually know much about him but hisstrategies early this year was a good beginning, I have made over 1.6 million under his services
William Munny
HitMan89 May 05, 2022 11:53AM ET
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Powell Nov 21: retire the word "transitory" Powell Nov 22 : retire the phrase "soft landing"
Forex Harbingers
ForexHarbingers May 05, 2022 9:56AM ET
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Know whats messed up? Based on the numbers, GDP, inflation, employment, etc show we should already be at 2.25% and still raising. This is too slow and they know it. Thats why they sold that "transitory" mess so hard. Prepare for harder times. This bubble we are in pushing the inflation is equal in weight to both the dot.com bubble and 2008 recession combined. Please prepare, stock up on canned goods, water, etc. And just like every inflationary spike we have had, has had a worse 2nd inflationary spike. Be smart, protect yourself.
Murali Krishna
Murali Krishna May 05, 2022 9:41AM ET
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Dr. Jerome Bubble Powell made a fool of himself. He has been thinking that he is too smart. PutinOpec are smarter.
Jamie An
Jamie An May 05, 2022 1:27AM ET
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Coward Mr Powell is leading US economy to the historical Recession. He made Big mistake again and he can not be a real hawkish controller even it is very needed. He can't.
Meru Pet
Meru Pet May 04, 2022 9:52PM ET
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check the price of gold
Marco cuevas
Marco cuevas May 04, 2022 8:32PM ET
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All these comments are from salty investors who lost money today, that's why shouldn't be investing...leave it to the big boys.
Ron George
Ron George May 04, 2022 8:09PM ET
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Powell is a milktoast of an FOMC chair … he couldn’t carry Volker’s jock nor could he articulate a nursery rhyme! His ignorance, misguided fascination of the Fed’s economic intelligence will cost American families dearly over the next decade. Not only should we end the Fed but its high time for an Amerexit!
Jamie An
Jamie An May 04, 2022 7:56PM ET
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Mr Powell make Big mistake again for hiding his previous fault, losing time for react to inflation in last year. He leads us to Recession and long long inflation era.
Mr George
Mr George May 04, 2022 7:43PM ET
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Lol they should put an immediate increase of a 5% at least in interest rate and they increase only a 0,50% and still play a tender tone? You gotta be kidding
Milan Shukla
Milan Shukla May 04, 2022 7:43PM ET
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Same J Powell raised rates for no reason in 2018 in a showdown again Trump. Must be bribed by Soros
Criz Criz
Criz Criz May 04, 2022 7:43PM ET
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If you want to fight with inflation you should increase interest rate to similar % as inflation. Otherwise this changed nothing.
 
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