[The Epoch Times, May 5, 2022](Comprehensive report by The Epoch Times reporter Lin Yan)FedIt was announced on Wednesday (May 4) that theFederal benchmark rateIncrease by 2 yards to between 0.75% and 1%, while also shrinking the balance sheet from June 1. The Fed also hinted that it will continue to raise interest rates steadily this year.
The rate hike was in line with market expectations.FedAfter the announcement of the resolution, the short-term gains of U.S. stocks and U.S. bonds expanded, and the dollar fell further.
According to the statement, all Fed members unanimously agreed to raise interest rates, saying in a statement released after the meeting: “Job growth has been strong and unemployment has fallen sharply in recent months. Inflation remains high, reflecting pandemic-related Supply and demand imbalances, higher energy prices, and broader price pressures.”
The Fed also said it is highly concerned about inflation risks. The outside world believes that whether it is raising interest rates or shrinking the balance sheet, it is highly consistent with the discussions at the last Fed meeting.
According to the Fed’s statement, the balance sheet reduction will be phased in over three months. For U.S. Treasuries, it was initially set to shrink by up to $30 billion per month, and three months later, the cap was raised to $60 billion per month.
For agency bonds and agency MBS, the maximum monthly reduction was initially set at $17.5 billion, and three months later, the monthly reduction cap was raised to $35 billion. This time the table is shrinking much faster than in 2017.
The Fed’s statement also said that U.S. economic activity “dipped in the first quarter” but that “household spending and business fixed investment remained strong,” although inflation “remained high.” U.S. gross domestic product fell 1.4% in the first quarter.
Finally, the statement addressed the COVID-19 outbreak in China, where “COVID-related lockdowns in China could exacerbate supply chain disruptions, and the Committee is highly concerned about inflation risks”.
Fed raises interest rates two yards for first time in 22 years
Since 2000, the Fed has never raised rates by more than 0.25 percentage points in one go. The 50-basis-point increase announced on Wednesday was the largest rate hike by the Fed in 22 years and the first time since 2006 that it has raised rates at two consecutive meetings.
With the onset of the pandemic crisis in early 2020, the Fed cut its benchmark federal funds rate to a range of 0%-0.25% and enacted an aggressive bond-buying program that more than doubled its balance sheet to reach about $9 trillion. Meanwhile, Congress approved a series of bills that injected more than $5 trillion in fiscal spending into the economy.
These policy moves have been accompanied by supply chain congestion and a surge in demand. The 12-month inflation rate rose 8.5% in March, according to the Bureau of Labor Statistics’ consumer price index.
CNBC reported that Fed officials have been trying for months to use “transitional” to distinguish this inflation surge from past ones, but now they have to reconsider that stance because inflationary pressures haven’t abated for months.
Powell: Not actively considering a 3-yard rate hike
Markets now expect the Fed to continue aggressive rate hikes in the coming months, possibly reaching a 75 basis point hike in June.
Wednesday’s hike will push the federal funds rate to a range of 0.75% to 1%, according to CME Group, and the market is pricing in a rise to 3% to 3.25% by the end of the year. This means that the market predicts that the Fed will raise interest rates by another 9 yards within this year. There is already speculation that the remaining four Fed meetings this year will raise rates by two yards each.
Federal Reserve Chairman Jerome Powell said in a subsequent news conference that the Fed is likely to raise interest rates by 50 basis points after the next few meeting, but he rejected market expectations of more aggressive rate hikes by the Fed – the likelihood of a single 75 basis point hike.
“The 75 basis point increase is not something the committee is actively considering,” he said.considermatters. “
Powell also said he did not see a recession as something that would happen automatically when monetary policy tightens, noting that the U.S. “has a good chance of a soft landing.”
Opening his news conference, Powell said that fighting very high inflation is the Fed’s number one job.
Inflation is too high, he said, and the Fed has the tools to do the job.
Investors focus on where the Fed’s rate hike will end
The “Wall Street Journal” published an early article that investors will focus on the information that Fed Chairman Powell will raise interest rates after this year at a press conference on Wednesday to fight inflation, and that the ultimate point of this round of interest rate hikes will be set at what target level.
Powell said that it is difficult to say how high the Fed will eventually raise interest rates. The Fed will not hesitate if we confirm that we need to go higher.
Fed officials believe that the neutral rate should be in the range of 2% to 3%, which refers to the level of interest rate that neither stimulates nor slows the economy. The U.S. federal funds rate affects the cost of borrowing for other consumers and businesses across the economy.
The question for the market now is how many 50 basis point rate hikes the Fed will consider to move rates closer to neutral sooner.
Some economists believe that with underlying inflation already so high, the Fed will have to raise rates even higher to maintain policy neutrality. The U.S. Commerce Department’s Personal Consumption Expenditure Price Index (PCE), an inflation indicator favored by the Fed, showed that consumer prices rose 6.6 percent year-on-year in March, the highest increase in 40 years.
Many analysts believe that if inflation does not fall below 3%, the Fed will raise interest rates above neutral, significantly increasing the risk of a recession.
Fitch, the international rating agency, said the Fed’s singular focus on fighting inflation is creating huge risks to the U.S. outlook.
Fitch’s chief economist Brian Coulton said the risk of a sharp growth slowdown or even a recession in 2023 due to monetary tightening is growing as inflationary pressures persist.
Responsible editor: Lin Yan#
