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Federal Reserve Halves Key Rate to Control Inflation – Chicago Tribune

Washington — The Federal Reserve has stepped up its fight against the worst inflation in 40 years by raising benchmark rates by 0.5 percentage points on Wednesday. This is the most aggressive move since 2000 and shows that there will be even more significant rate hikes in the future.

The Federal Reserve’s major rise in short-term interest rates has raised it from 0.75% to 1%. This is the highest point since the pandemic occurred two years ago.

The Fed has also announced that it will begin reducing its $ 9 trillion balance sheet, which consists primarily of Treasury bonds and mortgages. Reducing these holdings has the effect of further raising loan costs across the economy.

As food, energy and consumer goods prices accelerate, the federal government’s goal is to cool spending and economic growth by making it more expensive for individuals and businesses to rent. Central banks expect that higher mortgage, credit card, and car loan costs will slow down spending enough to curb inflation, but not enough to cause a recession.

It is an act of delicate balance. The Federal Reserve has endured widespread criticism that it was too late to start tightening credit. Many economists are skeptical that they can avoid the cause of the recession.

At a press conference on Wednesday, Chair Jerome Powell revealed that there would be a further significant rate hike. He said the Fed’s additional half-point increase in key rates “should be at the table at the next few meetings” in June and July.

But Powell also sought to downplay speculation that the Fed may be considering raising rates by three-quarters of a percentage point.

“The increase in 75 basis points is not something the Commission is actively considering,” he said — a statement that seemed to spike the stock index. Before he spoke, the Dow Jones Industrial Average had risen moderately. In less than an hour, the Dow rose by more than 700 points.

At a press conference, Powell emphasized his belief that “restoring price stability,” or curbing high inflation, is essential to maintaining economic health.

In a statement Wednesday, central bank policymakers noted that Russia’s invasion of Ukraine has exacerbated inflationary pressures by raising oil and food prices. “A COVID-related blockade in China could exacerbate supply chain turmoil,” he added, adding that it could further boost inflation.

Inflation reached 6.6% last month, the highest in 40 years, according to the Federal Reserve’s recommended gauge. Inflation accelerated due to strong consumer spending, chronic supply bottlenecks, and a combination of sharply rising gas and food prices, exacerbated by Russia’s war with Ukraine.

Starting June 1, the Fed has allowed bonds up to $ 48 billion to mature without exchanging bonds, saying it will reach $ 95 billion by September. At the pace of September, the balance sheet will shrink by about $ 1 trillion annually. The balance sheet more than doubled after the pandemic recession as the Fed bought trillions of dollars in bonds to curb long-term borrowing rates.

Powell says he wants to quickly raise the Fed’s rate hikes to levels that neither stimulate nor curb economic growth. The Federal Reserve has suggested reaching that point by the end of the year, with the Fed at around 2.4%.

Some economists have warned that some of the factors that drive inflation, especially the shortage of supplies and workers, are outside the Fed’s ability to resolve.

Jim Beard, Chief Investment Officer of Plant Moran Financial Advisors, said: “The Fed’s tightening will not reopen its factories in China, increase grain shipments from Ukraine, relocate container ships where needed, or hire trucks to move goods. “

The Fed’s credit crunch has already had some impact on the economy. Existing home sales fell 2.7% from February to March, reflecting the fact that mortgage rate hikes are partly related to the Fed’s planned rate hikes. The average interest rate on 30-year mortgages has risen 2 percentage points since the beginning of the year to 5.1%.

But in most cases, the economy as a whole remains healthy. This is especially true of the US employment market. Employment is strong, layoffs are low, the unemployment rate has been low for nearly 50 years, and job openings have reached record highs.

Powell pointed out the widespread availability of employment as evidence that the labor market is tight-to “unhealthy levels” that tend to encourage inflation. The Federal Reserve is betting that higher interest rates could reduce those openings, which would delay wage increases and ease inflationary pressures, perhaps without causing mass severance.

So far, employment is strong, the economy has increased at least 400,000 jobs for 11 consecutive months, employers are tackling labor shortages, and wages are rising at a pace of about 5% per year. I am. These salary increases promote stable consumer spending despite soaring prices. In March, consumers increased spending by 0.2% after adjusting for inflation.

Powell said last month that even if the Fed’s benchmark rates rose to 2.5% by the end of the year, policymakers could tighten credit even more “if it turns out to be appropriate.” ..

Financial markets have hit a high of 3.6% by mid-2023, which will be the highest in 15 years. Shrinking the Fed’s balance sheet adds an additional layer of uncertainty surrounding the Fed’s actions, which can undermine the economy.

Complicating the Fed’s mission is the slowdown in global growth. The blockade of COVID-19 in China could cause a recession in the world’s second-largest economy. And the European Union is facing rising energy prices and supply chain disruptions after Russia’s invasion of Ukraine.

In addition, other central banks around the world are raising interest rates, a trend that could further impede global growth. On Thursday, the Bank of England is expected to raise key rates for the fourth consecutive year. The Reserve Bank of Australia raised interest rates on Tuesday for the first time in 11 years.

Economists also expect the European Central Bank, which is slower than the US and the UK, to raise interest rates in July.

AP Economics writer Paul Wiseman contributed to this report.

Federal Reserve Halves Key Rate to Control Inflation – Chicago Tribune

Source link Federal Reserve Halves Key Rate to Control Inflation – Chicago Tribune

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