The Fed raises rates by half a point and begins to reduce its balance sheet on June 1


In a widely expected decision, the Fed set its target federal funds rate in a range between 0.75% and 1% in a unanimous decision, and Fed Chairman Jerome Powell said policymakers were ready. to approve rate hikes of half a percentage point at upcoming policy meetings. in June and July.

The level of specificity – effectively announcing Fed rate hikes in advance – was unusual, but showed that Powell steered a course between high inflation that requires a strong Fed response and an attempt to avoid the kind exaggeration that could tip the economy into recession.

At a press conference after the release of the Fed’s policy statement, Powell explicitly ruled out a three-quarters percentage point rate hike at an upcoming meeting, a comment that sparked a stock market rally. .

But he also clarified that the rate hikes the Fed already had in mind were “not going to be nice” because they force Americans to pay more for home loans and car loans, and possibly reduce the value of assets. .

The Fed also said it would begin next month to reduce the reserve of about $9 trillion in assets accumulated during its efforts to combat the economic impact of the coronavirus pandemic as another lever to rein in inflation.

“It’s very unpleasant,” Powell said of the impact on households from inflation, which is about three times higher than the Fed’s 2% target. “If you’re a normal economic person, then you probably don’t have… that much more… to spend and that immediately affects your spending on groceries… gas, energy and things like that. So we understand the pain involved. “

STABLE PRICES

Powell told reporters that he and his colleagues at the Fed were determined to restore price stability, even if that meant taking steps that would lead to lower business investment and household spending, as well as slower growth. economic. The implications of runaway inflation, he said, were worse.

“At the end of the day, everyone is better off… with stable prices,” Powell said.

Still, Powell said he believes the U.S. economy is doing well and is strong enough to weather future rate hikes without being dragged into recession or even seeing a significant rise in unemployment.

Despite a decline in gross domestic product in the first three months of this year, “household spending and business fixed investment remain strong. Job gains have been robust,” the Federal Open Market Committee said. central bank in its policy statement.

Officials sharpened their description of the risks of continued high inflation, particularly with factors emerging since the start of the year including the war in Ukraine and new coronavirus lockdowns in China.

“The Committee is very attentive to inflation risks,” the Fed said in language interpreted by analysts as a sign of the Fed’s commitment to pushing interest rates as high as necessary to bring inflation back down. , and expectations surrounding its future trajectory, at 2% target.

BALANCE SHEET REDUCTION

The statement said the Fed’s balance sheet, which soared to around $9 trillion as the central bank tried to shield the economy from the pandemic, would be allowed to decline by $47.5 billion a month in June, July and August and up to $95 billion per month beginning in September.

Policymakers did not release new economic projections after this week’s meeting, but data since their last meeting in March has given no definitive idea that inflation, wage growth or a torrid pace of hiring had started to slow down.

U.S. stock markets surged after the announcement, extending gains after Powell poured cold water on the idea of ​​raising rates by three-quarters of a percentage point. The S&P 500 index closed up about 3%, posting its biggest one-day percentage gain in nearly a year.

Government bond yields fell sharply in volatile trading as the dollar weakened against a basket of currencies from major trading partners.

“This one was well communicated and well delivered,” said Simona Mocuta, chief economist at State Street Global Advisors. “There is a realization that they are tightening up in a slowing economy and there are associated risks. For the scale of the move, it was uneventful, and that’s a good thing. .”

(Reporting by Howard Schneider; Additional reporting by Saqib Ahmed and Chuck Mickolajczak in New York; Editing by Paul Simao)

By Howard Schneider and Ann Saphir

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