Fed Hikes Rates Half-Point as Powell Signals Similar Moves Ahead

Courtesy of Matthew Boesler and Steve Matthews, Bloomberg

  • Interest-rate increase marks largest upward move since 2000
  • Stocks rally as Powell pushes back on 75 basis-point Fed move

The Federal Reserve delivered the biggest interest-rate increase since 2000 and signaled it would keep hiking at that pace over the next couple of meetings, unleashing the most aggressive policy action in decades to combat soaring inflation.

The U.S. central bank’s policy-setting Federal Open Market Committee on Wednesday voted unanimously to increase the benchmark rate by a half percentage point. It will begin allowing its holdings of Treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of $47.5 billion, stepping up over three months to $95 billion.

“Inflation is much too high and we understand the hardship it is causing and we are moving expeditiously to bring it back down,” Chair Jerome Powell said after the decision in his first in-person press conference since the pandemic began. He added that there was “a broad sense on the committee that additional 50 basis-point increases should be on the table for the next couple of meetings.”

Powell’s remarks ignited the strongest stock-market rallyon the day of a Fed meeting in a decade, as he dashed speculation that the Fed was weighing an even larger increase of 75 basis points in the months ahead, saying that it is “not something that the committee is actively considering.”

Fed's balance sheet is equivalent to a third of the size of U.S. GDP

Wednesday’s increase in the FOMC’s target for the federal funds rate, to a range of 0.75% to 1%, follows a quarter-point hike in March that ended two years of near-zero rates to help cushion the U.S. economy against the initial blow from Covid-19.

Goldman Sachs Group Inc. economists led by Jan Hatzius revised up their forecast following Powell’s remarks to include a 50 basis-point increase in July, in addition to the half-point move they already expected in June.

“A fourth 50 basis point rate hike is possible in September too, but we are maintaining our forecast that the FOMC will revert to 25 basis point hikes at that point until we see additional data,” they wrote in a note to clients. “We have not changed our terminal rate forecast of 3%-3.25%, but we now expect to reach that rate” by the second quarter of next year, three months earlier than they previously predicted.

Policy makers, who widely signaled their intention to step up the pace of rate increases, are trying to curb the hottest inflation since the early 1980s. Back then, Chair Paul Volcker raised rates as high as 20% and crushed both inflation and the broader economy in the process. The Fed’s hope this time around is that the combination of higher borrowing costs and a shrinking balance sheet will deliver a soft landing that avoids recession while tamping down inflation.

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