• Fed Follows Through With Biggest Rate Increase Since May 2000

    In a unanimous decision, the Federal Reserve’s policy-setting committee boosted interest rates by 50 basis points, or half a percentage point, for the largest increase since May 2000 as it seeks to tackle inflation.

    The decision sets the overnight lending target rate for banks to between 0.75% and 1% and follows the Fed’s initial hike of 25 basis points at its meeting in March. The central bank also said it will begin to trim its balance sheet of Treasurys and mortgage-backed securities on June 1. Taken together, the tightening action marks the Fed’s most aggressive monetary stance in decades as inflation has reached a 40-year high.

    Federal Reserve Chairman Jerome Powell opened his post-meeting press conference, the first time it has been hosted in person since the pandemic's onset, with a statement to “the American people” offering reassurance that the Fed recognizes that inflation is too high but asserting that the Federal Open Market Committee has the tools to fight inflation effectively.

    In its statement, the Fed noted that “ongoing increases ... will be appropriate," and Powell suggested that hikes of 50 basis points were likely at the central bank's next two meetings, while noting that there remains a great deal of uncertainty in the economic environment. The Fed’s statement included references to both the war in Ukraine and the COVID-related shutdowns in China’s manufacturing centers as risks, which have contributed to escalating prices of food and energy and exacerbated disruptions to supply chains.

    The Fed’s process of quantitative tightening would target a reduction of Treasury holdings by $17.5 billion and of holdings of agency securities by $30 billion in each of the next three months, rising to $35 billion and $60 billion, respectively, per month thereafter. Its balance sheet reached almost $9 trillion as the Fed intervened in markets to support the economy during the pandemic.

    The announcement of a rate hike came as no surprise as Fed governors have been broadcasting their intent to tighten policy further. Powell all but promised a 50-basis point increase while at an event last month. The Fed has been seen by many as too accommodative, acting too late, and there are those that have suggested it must now be far more aggressive at monetary tightening in the coming months to achieve price stability.

    Aggressive rate hikes, however, come with the risk of slowing the economy too much and tipping it into recession. The economy contracted in the first quarter of 2021, with gross domestic product growth falling by 1.4% in the Commerce Department’s advance estimate. This was largely because of companies allowing their inventories to run down after stocking up in the second half of last year ahead of supply-chain disruptions and a drop in net exports as imports surged.

    But in response to several questions about the possibility of falling into a recession, Powell reiterated the committee’s position that the economy is on very strong footing given the strength of household spending and business fixed investment and that it is well positioned to tolerate tighter monetary policy.

    Source: www.CoStar.com