The Federal Reserve on Wednesday raised short-term interest rates by 0.50% as part of its efforts to reduce inflationary pressures on Americans.
The central bank has predicted that it will further increase borrowing costs this year as it tries to repeal its easy money policies from the pandemic era. The policy-making Federal Open Market Committee also has detailed plans to expand its balance sheet of nearly $ 9 trillion.
The decision to raise interest rates by 0.50% marks the most aggressive increase in a meeting since May 2000. For the past two decades, the Fed has chosen to raise interest rates in just 0.25% steps, with the latest move highlighting the seriousness of which inflation currently represents.
“The committee is extremely vigilant about inflation risks,” the FOMC said in an updated policy statement.
The Fed is now targeting interest rates in the range of 0.75% to 1.00%, with some Fed officials advocating raising the target to 2.5% by the end of the year.
The Fed’s increases are bleeding into the economy in the form of higher interest rates on credit products such as credit cards, mortgages and business loans. Following the Fed’s first rate hike since COVID-19 in mid-March, 30-year fixed mortgage rates have risen by a full percentage point to more than 5%.
The Fed said it noted a number of geopolitical risks, noting that COVID shutdowns in China “are likely to exacerbate supply chain disruptions.” The FOMC said it was continuing to monitor the economic consequences of Russia’s invasion of Ukraine, which could add “additional upward pressure” on inflation.
The decision was unanimously adopted by the members of the commission with the right to vote.
Fed Chairman Jerome Powell testified during the Senate Banking Committee hearing entitled “Semi-Annual Report on Monetary Policy to Congress” in Washington, DC, March 3, 2022. Tom Williams / Poole told REUTERS
Balance update
The Fed also officially unveiled a strategy to shrink its assets after buying trillions of dollars in US bonds and mortgage-backed securities to limit COVID’s impact on financial markets.
As duration-based securities eventually mature, the Fed retained its assets by reinvesting principal payments back into similar securities.
The story continues
The central bank announced on Wednesday that it would allow up to $ 47.5 billion a month from June 1 – $ 30 billion in US bonds and $ 17.5 billion in mortgage-backed securities – to go off balance. This rate will be maintained from June to August until September, when the Fed raises this limit to $ 95 billion ($ 60 billion in US bonds and $ 35 billion in mortgage-backed securities).
The Fed hopes the process will allow it to reduce its assets by $ 9 trillion, although the central bank has not clarified how small it will allow its balance sheet to shrink.
“The committee is ready to adjust every detail of its approach to reducing the balance sheet in the light of economic and financial developments,” a separate Fed statement said, detailing the plans.
Preliminary discussions on the so-called “quantitative tightening” process were held at the FOMC meeting in March.
The next Fed meeting will be held on June 14 and 15.
Brian Chung is a reporter covering the Fed, economics and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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