The Federal Reserve intensified its fight against the worst inflation in 40 years by raising its benchmark interest rate by a half-percentage point Wednesday — its most aggressive move since 2000. The increase in the Fed’s key short-term rate raised it to a range of 0.75% to 1%, the highest point since the pandemic struck two years ago. Chairman Jerome Powell stressed that the Fed is sharply raising rates to rein in high inflation, sustain the economy’s health and ease the stress that millions of households are facing. “Inflation is much too high,” he said, “and we understand the hardship it is causing.”
It will be a delicate balancing act. The Fed has endured widespread criticism that it was too slow to start tightening credit, and many economists are skeptical that it can avoid causing a recession. “I see a strong economy,” he said. “Nothing about it says it’s close to or vulnerable to a recession.” Powell also made clear that additional rate increases are coming. He said half-point increases in the Fed’s key rate “should be on the table in the next couple of meetings” in June and July.
Inflation, according to the Fed’s preferred gauge, reached 6.6% last month, the highest in four decades. It has been accelerated by a combination of robust consumer spending, chronic supply bottlenecks and sharply higher gasoline and food prices.
Starting June 1, the Fed said it would allow up to $48 billion in bonds to mature without replacing them for three months, then shift to $95 billion by September. At September’s pace, its balance sheet would shrink by about $1 trillion a year. The balance sheet more than doubled after the pandemic recession hit as the Fed bought trillions in bonds to try to hold down long-term borrowing rates.
Financial markets are pricing in a Fed rate as high as 3.6% by mid-2023, which would be the highest in 15 years. Shrinking the Fed’s balance sheet will add another layer of uncertainty surrounding how much the Fed’s actions may weaken the economy. Complicating the Fed’s task is a slowdown in global growth. Covid-19 lockdowns in China are threatening to cause a recession in the world’s second-largest economy. And the European Union is facing higher energy prices and supply chain disruptions after Russia’s invasion of Ukraine.
Information for this article was contributed by Christopher Rugaber and Paul Wiseman of The Associated Press, Jeanna Smialek of The New York Times and Don Lee of the Los Angeles Times (TNS). This content was originally published here.