The US Federal Reserve stepped up its effort to stem the worst inflation in 40 years by raising its short-term benchmark interest rate by a sizeable half a percentage point
The US Federal Reserve stepped up its effort to stem the worst inflation in 40 years by raising its short-term benchmark interest rate by a sizeable half a percentage point
The Federal Reserve stepped up its fight against the worst inflation in 40 years by raising its short-term interest rate by half a percentage point on Wednesday – the most aggressive measure since 2000 – and announcing more large rate hikes.
The Fed’s interest rate hike pushed it to a range of 0.75% to 1%, the highest level since the pandemic two years ago.
The Fed also announced that it would begin reducing its massive $9 trillion balance sheet, which consists mostly of Treasury and mortgage bonds. Those stocks more than doubled after the pandemic recession, when the Fed bought trillions of bonds to try to keep long-term lending rates low. The reduction in Fed holdings will cause the cost of borrowing to continue to rise across the economy.
All in all, over time, the Fed’s credit crunch is likely to result in higher borrowing rates for many consumers and businesses, including on mortgages, credit cards, and auto loans. With food, energy and consumer goods prices soaring, the Fed’s goal is to slow spending — and economic growth — by making it more expensive for individuals and businesses to borrow. The central bank hopes higher borrowing costs will slow spending enough to tame inflation, but not so much as to trigger a recession.
It’s going to be a delicate balancing act. The Fed has endured widespread criticism for being too slow to start tightening credit, and many economists are skeptical that it can avoid a recession.
Inflation, on the Fed’s preferred measure, hit 6.6% last month, the highest in four decades. Inflation has been fueled by a combination of resilient consumer spending, chronic supply shortages and soaring gas and food prices, exacerbated by Russia’s war in Ukraine.
As of June 1, the Fed said it would mature up to $48 billion worth of bonds without replacing them, a pace that would reach $95 billion by September. At September’s pace, its balance sheet would shrink by about $1 trillion a year.
Chairman Jerome Powell has said he wants to raise the Fed’s interest rate quickly to a level that neither stimulates nor hampers economic growth. Fed officials have indicated that they will reach that point, which the Fed says is around 2.4%, by the end of the year.
