Aggressive inflation-fighting moves flagged by Federal Reserve – NBC Chicago

Federal Reserve officials signal they will take an aggressive approach to tackling high inflation in the months ahead – actions that will make borrowing significantly more expensive for consumers and businesses and increase risks to the economy. .

In the minutes of their March policy meeting, released Wednesday, Fed officials said interest rate hikes of half a point, rather than traditional quarter-point increases, “could be appropriate” several times this year.

At last month’s meeting, many Fed policymakers favored a half-point hike, according to the minutes, but waited due to uncertainties created by the US invasion. Ukraine by Russia. Instead, the Fed raised its key short-term rate by a quarter point and signaled that it planned to continue raising rates until next year.

Inflation rose 7.9% in February 2022, the biggest rise in the consumer price index in 40 years, the Labor Department reported. But what exactly is inflation? And what causes it?

The minutes say the Fed is also moving toward a rapid reduction in its massive $9 trillion bond inventory in the coming months, a move that would help drive up borrowing costs. Policymakers said they would likely reduce those holdings by about $95 billion a month, nearly double the pace they implemented five years ago when they last reduced their balance sheets.

The plan to rapidly reduce their bond holdings marks the latest move by Fed officials to step up their inflation-fighting efforts. Prices are rising at the fastest rate in four decades, and officials have expressed growing concern about inflation.

The Fed’s plans “reflect their deep unease with the rapid pace of inflation,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.

The Fed is “increasingly concerned” that consumers and businesses are beginning to expect price spikes to persist, Bostjancic added, a trend that can itself prolong high inflation.

Many economists have said they fear the Fed has waited too long to start raising rates and could be forced to react so aggressively that it would trigger a recession. Indeed, Deutsche Bank economists predict the economy will fall into recession late next year, noting that the Fed, “now finding itself well behind the curve, has given clear signals that it shifts to a more aggressive mode of tightening.”

The stock market sold off when the minutes were released, but then rebounded from its worst levels. Still, the S&P 500 index closed nearly 1% lower after a steep decline on Tuesday.

Markets are now expecting much steeper rate hikes this year than announced by Fed officials at their mid-March meeting. At this meeting, policymakers forecast their benchmark rate to remain below 2% by the end of this year and 2.8% by the end of 2023, up from its current level of below 0. .5%. But Wall Street now expects the Fed rate to hit 2.6% by the end of the year, with further hikes next year.

The Fed’s rate hike will in turn increase the costs of mortgages, auto loans, credit cards and business loans. In this way, the Fed hopes to slow economic growth and rising wages enough to rein in high inflation, which has hurt millions of households and poses a serious political threat to President Joe Biden.

Chairman Jerome Powell opened the door two weeks ago to a rate hike of up to half a point. Lael Brainard, a key member of the Fed’s Board of Governors, and other officials have also made it clear that they are considering such increases. Most economists now expect the Fed to hike rates by half a point at its May and June meetings.

In a speech on Tuesday, Brainard pointed to the Fed’s growing aggressiveness, saying its bond holdings will “shrink considerably faster” over “a much shorter period” than the last time it reduced its balance sheet, from 2017 to 2019. At that time, the balance sheet was around $4.5 trillion. Now it is twice as big.

On Wednesday, Federal Reserve Chairman Jerome Powell took questions from lawmakers.

After the pandemic hit the economy two years ago, the Fed bought trillions in Treasury bills and mortgage bonds, in an effort to drive down rates on longer-term loans. It also cut its benchmark short-term rate to near zero.

In a sign of how quickly the Fed is changing course, the last time the Fed bought bonds there was a three-year gap between when it stopped buying, in 2014, and when it started reducing the balance sheet, in 2017. Now, that change is expected to happen in three months or less, with the balance sheet reduction likely to be announced as early as May.

Brainard’s remarks prompted a sharp rise in the 10-year Treasury bill rate, which influences mortgage rates, business loans and other borrowing costs. On Wednesday, this rate reached 2.6%, against 2.3% a week earlier and 1.7% a month ago. Average mortgage rates jumped to 4.67% last week, according to mortgage buyer Freddie Mac, the highest since 2018.

Shorter-term bond yields jumped further, in some cases above the 10-year yield, a trend that has often been seen as a sign of an impending recession. Fed officials, however, say shorter-term bond market trends are not sending the same warning signals.

Gennadiy Goldberg, senior U.S. rates strategist at TD Securities, said the narrow spread between long- and short-term bond yields indicates investors believe the economy will slow enough over the next two years to force the Fed to reduce rate hikes.

To shrink its balance sheet, the Fed will let some of its bonds mature without reinvesting the proceeds. The impact this might have is uncertain. Powell said last month that the reduction in bond holdings would equate to another rate hike. Economists estimate that a balance sheet reduction of $1 trillion a year would be equivalent to one to three additional quarter-point increases in the Fed’s short-term benchmark rate each year.

Treasury Secretary Janet Yellen, who preceded Powell as Fed chair, suggested during a congressional hearing on Wednesday that Russia’s invasion of Ukraine would likely continue to drive up inflation in the months ahead. future.

“The sanctions we imposed on Russia are driving up the price of energy,” Yellen said. “When energy prices go up, the price of wheat and corn that Russia and Ukraine produce goes up, and the metals that play an important industrial role go up.

NBC Chicago

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