Fed hikes interest rate to highest since 2000
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The Federal Reserve raised interest rates for the first time in more than two decades on Wednesday, signaling that further monetary tightening is on the way as it seeks to slow the economy and reduce inflation.
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Fed hikes interest rate to highest since 2000
The US Federal Reserve hiked its basic interest rate by 50 basis points, or 0.5 percent, citing strong inflation, and indicated it will sell some assets from its $9 trillion balance sheet. The rate increase is the largest since the dot-com stock bubble burst in May 2000.
Fed chair Jerome Powell stated Wednesday that inflation "is much too high," adding that "we have both the tools we need and the resolve it will take to bring it down.”
Read more: Federal Reserve Chief: Nothing suggests US vulnerable to recession
However, as Powell pointed out, the Fed's policies can only affect demand, not supply interruptions, which have been "longer-lasting than anticipated." He blamed the supply issues on Covid-19 lockdowns in China and the Ukraine war.
According to the Fed, it is also "significantly reducing the size of our balance sheet," mostly through the sale of securities assets over time. Principal payments from securities stored in the System Open Market Account (SOMA) will be reinvested beginning June 1 if they surpass $30 billion per month. By September, the monthly maximum will be raised to $60 billion. The first monthly ceiling on agency debt and mortgage-backed securities will be $17.5 billion, increasing to $35 billion after three months. The Fed's balance sheet is estimated to be about $9 trillion.
Read more: US inflation up to nearly 40-year high of 7%
Referring to a phenomenon where higher wages drive up prices of goods and services, Powell stated "We can't allow a wage-price spiral to happen."
He described the labor market as "extremely tight," pointing out that there were 11.9 million job openings and 6 million unemployed Americans, an almost 2:1 ratio. He predicted that the unemployment rate would "nudge" higher as more Americans returned to work.
Powell argued that everyone will be better off in the medium-to-long term, even if it will be hard for Americans to deal with the inflation.
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