WASHINGTON ( Associated Press) – The Federal Reserve on Wednesday intensified its fight against the worst inflation in 40 years by raising its benchmark short-term interest rate by half a percentage point – its most aggressive move since 2000 – and bigger rates to come. indicated an increase.
The Fed’s key rate hike raised it to 1% from 0.75%, the highest point since the pandemic two years ago.
The Fed also announced that it would begin shrinking its massive $9 trillion balance sheet, which mainly consists of Treasury and mortgage bonds. Holdings more than doubled after the pandemic slowdown as the Fed bought trillions of bonds to try to slash long-term lending rates. Reducing the Fed’s holdings would further increase credit costs across the economy.
All told, the Fed’s credit tightening will mean higher lending rates for many consumers and businesses over time, including mortgages, credit cards and auto loans. With prices for food, energy and consumer goods rising, the Fed aims to cool spending – and economic growth, by making it more expensive for individuals and businesses to borrow. The central bank expects that higher borrowing costs will slow spending to reduce inflation, yet will not cause a recession.
It will be a delicate balancing act. The Fed has faced widespread criticism That credit hardening was too slow to begin, and many economists doubt it could avoid creating a recession.
In their statement on Wednesday, policymakers at the central bank said they are “extremely attentive to inflation risks.” The statement also said that Russia’s invasion of Ukraine is adding to inflationary pressures by raising oil and food prices. It added that “COVID-related lockdowns in China are likely to intensify supply chain disruptions,” which could further drive inflation.
Inflation hit 6.6% last month, according to the Fed’s preferred gauge, the highest point in four decades. Inflation has been accelerated by a combination of strong consumer spending, chronic supply constraints and increasingly high gas and food prices, exacerbated by Russia’s war against Ukraine.
Starting June 1, the Fed said it would allow $48 billion worth of bonds to mature without replacing them, a pace that would reach $95 billion by September. At the pace of September, its balance sheet will shrink by about $1 trillion annually.
Chair Jerome Powell has said he would To raise the Fed’s rate rapidly to a level that neither stimulates nor inhibits economic growth. Fed officials have suggested they will reach that point, which the Fed says is about 2.4% by the end of the year.
The Fed’s credit tightening is already having some effect on the economy. sale of existing homes It sank 2.7% from February to March, reflecting an increase in mortgage rates related to the Fed’s planned rate hikes. The average rate on a 30-year mortgage has jumped 2 percentage points to 5.1% since the beginning of the year.
Yet by most measures, the overall economy remains healthy. This is especially true for the US job market: hiring is strong, layoffs are few, unemployment is near a five-decade low and the number of job openings has reached record highs.
Powell points to the widespread availability of jobs as evidence that the labor market is tight – “to an unhealthy level” that would fuel inflation. The Fed is betting four that higher rates can ease those openings, which will potentially slow wage growth and ease inflationary pressures, without triggering massive layoffs.
For now, with strong hiring – the economy has added at least 400,000 jobs for 11 straight months – and employers grappling with labor shortages, wages are rising at a nearly 5% annual pace. Those wage hikes are driving steady consumer spending despite price increases. In March, consumers increased their spending by 0.2%, even after adjusting for inflation.
Even if the Fed’s benchmark rate is as high as 2.5% by the end of the year, Powell said last monthPolicymakers can still tighten debt – to a level that would stifle growth – “if that’s appropriate.”
Financial markets are pricing in a higher rate of 3.6% by mid-2023, the highest it will be in 15 years. Shrinking the Fed’s balance sheet would add another layer of uncertainty, which could undermine the economy.
Complicating the Fed’s task is a slowdown in global growth. The world’s second largest economy is at risk of recession due to the COVID-19 lockdown in China. And the EU is facing high energy prices and supply chain disruptions after Russia’s invasion of Ukraine.
In addition, other central banks around the world are raising rates as well, a trend that could further stifle global growth. On Thursday, the Bank of England is expected to raise its key rate for the fourth time in a row. Reserve Bank of Australia increased Its rate on Tuesday for the first time in 11 years.
And the European Central Bank, which has been battling slower growth than the United States or the United Kingdom, could raise rates in July, economists expect.
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