On Wednesday, the United States Federal Reserve raised the federal funds rate by 50 percentage points. The 0.50% hike was the agency’s highest rate of increase in the last 20 years.
Federal Funds Rate Went Up By 0.50%, Likely The First of Many Rate Increases
Federal Reserve Chairman Jerome Powell appeared before the media to announce their latest move. In a usual statement directed to all Americans, Powell noted the negative effect of inflation on lower-income workers.
“Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down… We’re strongly committed to restoring price stability,” he said. Powell’s statements hinted that the 50 basis points hike on the federal funds rate is likely the first of many. Hopefully, the rate of increase will cap itself at 0.50%.
The federal funds rate is the benchmark of how much banks charge each other for overnight lending. Consumer loan companies use the federal funds rate as the baseline when determining interest rates for various debt instruments.
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Fed To Also Reduce Asset Holdings
In addition, the Federal Reserve will also implement other programs to help fight inflation. Prices of goods and services are currently at all-time highs. In March alone, the inflation rate surged to 8.5% year-over-year. This is the fastest rate at which prices went up since 1982.
The US central bank said it will start jettisoning its asset holdings that form part of its $9 trillion balance sheet. During the pandemic, the Fed went on a bond-buying spree to keep money flowing while interest rates stood low. However, continued high demand for goods amid low supplies sparked inflation. Last year, the Federal Reserve began reversing course and began tightening its monetary policies.
Federal Funds Rate is Now 0.75% – 1.0%
The rate hike announced Wednesday means that the current federal funds rate will hover between 0.75% – 1.0%. Given that the agency will implement more hikes, current market pricing forecasts a year-end rate of 2.75%-3.0%.
Prior to the Fed announcement, markets already braced themselves for the eventuality. As a result, the stock markets generally warmed up to the development and posted gains on Wednesday. At the same time, Treasury yields retreated from the earlier highs they posted.
50 Basis Point Hikes Should Be Enough
In particular, investors seemed to welcome the fact that Powell won’t resort to higher rate hikes than the current 50 basis points. This is despite the fact that earlier market pricing leaned towards a 0.75% hike by June.
However, Powell dismissed the notion yesterday during the press conference. “Seventy-five basis points is not something the committee is actively considering,” Powell said. “The American economy is very strong and well-positioned to handle tighter monetary policy,” he added. Despite the tightened monetary policy, Powell sees the US economy making a soft landing once inflation goes down.
What do you think of the Federal Reserve’s move to raise the federal funds rate by 0.5%? Will this create an immediate effect on surging inflation? Or, will it take some time (and damage) before prices go down?
Tell us what you think. Share your thoughts in the comments section below.