Fed raises interest rates half a point, signals more to come
The Federal Reserve on Wednesday enacted its steepest interest rate increase in more than 20 years and indicated more monetary tightening is on the way, as it aims to slow the economy in order to bring inflation down.
Driving the news: The central bank's policy committee, following a two-day meeting, increased its target for short-term interest rates by half a percentage point, to a range of 0.75% to 1%. It also said it will begin shrinking its $9 trillion balance sheet of assets acquired as a form of pandemic-era stimulus.
Details: In a statement announcing the decision, the committee said that it "anticipates that ongoing increases" in rates will be appropriate and that it is "highly attentive to inflation risks."
- It noted that the Russian invasion of Ukraine is "creating additional upward pressure on inflation" and is "likely to weigh on economic activity." It added that COVID-related lockdowns in China are "likely to exacerbate supply chain disruptions."
- The decision was unanimous.
In a news conference following the announcement, chair Jerome Powell said "inflation is much too high and we understand the hardship it is causing," adding that the Fed is moving "expeditiously" to bring it down.
- He said that there is broad consensus among Fed policymakers around raising rates another half-percentage point at the next couple of meetings.
- However, he said that steeper rate increases, such as a 0.75 percentage point rise, are not currently on the table.
Financial markets are pricing in multiple half-point rate increases this year, resulting in the interest rate target reaching around 2.8% by the end of 2022. The last time the Fed increased rates by half a point at a single meeting was May 2000.
- The Fed also said it will shrink its holdings of securities acquired under its quantitative easing program by up to $47.5 billion per month through August and $95 billion after that by not replacing bonds that mature.
The combination of rapid rate increases and balance sheet reduction amounts to a double-barreled monetary tightening unlike any seen in decades.
- The prospect of higher rates has driven a volatile few weeks on Wall Street, as investors grapple with the possibility that the Fed will trigger a recession in the course of trying to bring inflation down.
- Already the cost of credit to consumers has been rising sharply, including a rapid run-up in mortgage rates since the start of the year.
Go deeper: The Federal Reserve blame game
Editor's note: This story has been updated with new details throughout.