The United States Federal Reserve (FED) decided this Wednesday to increase the reference interest rate by half a percentage point, the largest adjustment in two decades, and placed it in a range of between 0.75-1%, in order to stop the rise in prices which brought inflation to its highest level in the last 40 years.
The benchmark interest rate corresponds to the federal funds rate that establishes how much banks charge each other for short-term loansbut is also tied to a variety of adjustable-rate consumer debt.
The Fed, along with the rate hike, announced that it will start reducing asset holdings on its $9 trillion balance sheet.
The body had been buying bonds to keep interest rates low and money flowing through the economy during the pandemic, but rising prices forced a rethink of monetary policy.
FED Chairman Jerome Powell said that “inflation is too high and we understand the difficulties it is causing. We are moving quickly to bring it back down.”
During a press conference in Washington, Powell said that “we are strongly committed to restoring price stability.”
Powell said that adjustments of 50 basis points (half a point) “should be on the table in the next two meetings, as 75 basis points is not something the committee is actively considering.”
“The US economy is very strong and well positioned to handle tighter monetary policy,” Powell said.
In a statement, the Federal Open Market Committee decided to “begin to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities beginning June 1, as described in the Plans to Reduce the size of the Federal Reserve balance sheet that were issued in conjunction with this statement.
“In assessing the appropriate monetary policy stance, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the monetary policy stance accordingly if risks arise that could impede achievement of the objectives.” Committee’s objectives. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflationary pressures and inflation expectations, and financial and international developments,” the statement said.
Later, The FED noted that “although overall economic activity declined in the first quarter, household spending and business fixed investment remained strong. Job creation has been strong in recent months and the unemployment rate has declined substantially. Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, higher energy prices and broader pricing pressures.”
The Fed considered that the war in Eastern Europe also affected the economy since “Russia’s invasion of Ukraine is causing enormous human and economic difficulties. The implications for the US economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity.”
Regarding the Fed’s balance sheet improvement scheme, the monetary body revealed that “the Committee intends to reduce the Federal Reserve’s holdings of securities over time in a predictable manner, primarily by adjusting the amounts reinvested of the capital payments received from the securities held in the System Open Market Account (SOMA) As of June 1, the capital payments of the securities held in the SOMA will be reinvested to the extent that they exceed the limits monthly”.
The outline highlights that “for Treasury securities, the cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month. The decline in Treasury security holdings below of this monthly limit will include coupon Treasury securities and, to the extent coupon maturities are less than the monthly limit, Treasury bills For agency debt and agency mortgage-backed securities, the limit It will initially be set at $17.5 billion per month and after three months it will increase to $35 billion per month.”
