The Federal Reserve raised its benchmark policy rate by half a percentage point for the first time since 2000 and sent a strong signal that it intends to increase it by the same amount at the next two meetings as the US central bank embraced a more aggressive approach to tackling high inflation.
At the end of its two-day policy meeting on Wednesday, the Federal Open Market Committee lifted the target range of the federal funds rate to a range of 0.75 per cent to 1 per cent. It was the first time since 2006 that the central bank has implemented rate increases at back-to-back meetings.
At its March meeting, the Fed raised rates a quarter of a percentage point from the near-zero level where they had hovered since the onset of the pandemic. Since then, top officials have backed a much more rapid withdrawal of the pandemic-era stimulus in light of one of the tightest labour markets in history and signs that price pressures are becoming entrenched.
In a press conference following the announcement, Fed chair Jay Powell said: “There is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings.”
The committee said it was “highly attentive” to soaring inflation but warned of further upward pressure on prices stemming from supply chain bottlenecks caused by the war in Ukraine and Covid-19 lockdowns in China.
Latest step
The decision marked the Fed’s latest step to shift monetary policy to a so-called neutral position that neither speeds up nor slows down economic activity. Mr Powell in March said the central bank should move “expeditiously” towards that level this year.
Officials have suggested a neutral federal funds rate is somewhere between 2 and 3 per cent, but many economists believe it is much higher, given how much inflation has overshot the Fed’s 2 per cent target. Core inflation, as measured by the central bank’s preferred personal consumption expenditures price index, reached 5.2 per cent in March compared with the previous year.
Additional half-point rate rises are now expected in short order, with further adjustments likely in June and July. If the Fed then raises rates by just a quarter-point at each of the remaining meetings in September, November and December, the fed funds rate would hover between 2.5 and 2.75 per cent by the end of the year.
Fed officials argue the US economy is strong enough to withstand much tighter monetary policy without falling into a recession, an outcome that treasury secretary Janet Yellen said was possible but would be tricky to pull off. At an event on Wednesday, the former Fed chair said the central bank would need to be “skilful and also lucky” to achieve a so-called soft landing.
Immediately following the announcement, the two-year Treasury yield, which moves with interest rate expectations, dipped, suggesting the increase had been fully priced in by the market. On Wall Street, the S&P 500 and Nasdaq Composite indices rose to their highest level in a week before declining to trade roughly flat. – Copyright The Financial Times Limited 2022
