The Federal Reserve raised its benchmark interest rate by half a percentage point Wednesday, in a widely expected move that signals a more pronounced effort to combat inflation in the U.S. economy. The increase, the largest in more than two decades, raises the rate’s target range to between 0.75% and 1%.
In addition, the Fed said it will further tighten monetary conditions by shrinking its $9 trillion balance sheet. The central bank will reduce its holdings of Treasuries and mortgage-backed securities by $47.5 billion per month starting in June, with plans to increase that amount to $95 billion three months later.
"Inflation is much too high and we understand the hardship it is causing, and we are moving expeditiously to bring it back down,” Fed Chair Jerome Powell said at a press conference following a two-day meeting of the Federal Open Market Committee.
A well-telegraphed move: Wealth manager Peter Boockvar of the Bleakley Advisory Group described the Fed’s announcement as “historic yet uneventful” — historic because of the size of the interest rate hike, along with the prospect of similar increases in the coming months, and uneventful because it was so widely anticipated.
Still, Powell did deliver some important new information, including a confirmation that the bank was not planning more dramatic moves. Powell said that while the Fed would consider additional half-point rate hikes at “the next couple of meetings,” bank officials are not contemplating larger increases at this time — news that sparked a sizable rally on Wall Street as it eased fears about the central bank moving even more aggressively. (“Note the strong upward move in equity prices of just under 2%,” tweeted economist Joseph Brusuelas of advisory firm RSM, “one might say Powell stuck the landing.”)
Supply chain problems: Powell said that Fed officials are “highly attentive to inflation risks,” including ongoing problems with supply chains driven by Covid-19 and the war in Ukraine that are contributing to inflationary pressure.
At the same, Powell admitted that the Fed is limited in what it can do about those risks. “Our tools don’t really work on supply shocks,” he said. “Our tools work on demand.”
Saying the Fed needs to “stay in its lane” by focusing on cooling demand, Powell pledged to concentrate on the monetary tools it controls as seeks to achieve its dual mandate of price stability and maximum employment. “We’re focused on the job to do in demand and there’s plenty to be done there,” he said.
The threat of recession: Powell said he still thinks the Fed can cool the economy without pushing it into recession. “We have a good chance to have a soft or softish landing,” he said, adding that in his view, “the American economy is very strong, and well-positioned to handle tighter monetary policy.”
Even so, there are skeptics. Brian Coulton, chief economist at Fitch Ratings, said the Fed’s effort to restore something like normal economic conditions by the end of the year will be a difficult balancing act to pull off. “With inflation pressures ongoing, the risk of monetary tightening prompting a significant growth slowdown or even recession in 2023 is growing,” Coulton said in a note to clients.