Fed announces biggest interest rate hike since 2000 — RT Business News

The US central bank invokes inflation to raise the base interest rate by 0.5% and sell its balance sheet

Citing high inflation, the US Federal Reserve raised its base interest rate by 50 basis points, or 0.5%, and announced that it would sell some assets from its $9 trillion balance sheet. The rate hike is the highest since May 2000, when the dot-com stock market bubble burst.

“Inflation is way too high” Fed Chairman Jerome Powell said Wednesday afternoon, adding that “We have both the tools we need and the determination it will take to bring him down.”

However, noted Powell, Fed policies can only impact demand and not supply disruptions, which have been “more durable than expected.” He blamed the supply problems on the Covid-19 shutdowns in China and the conflict in Ukraine.

The Fed is also “significantly reduce the size of our balance sheet”, primarily by selling securities holdings over time. Starting June 1, principal payments for securities held in the System Open Market Account (SOMA) will be reinvested if they exceed $30 billion per month. This cap will increase to $60 billion per month by September. For agency debt and mortgage-backed securities, the initial cap will be $17.5 billion per month, doubling to $35 billion after three months. The Fed has an estimated balance sheet of $9 trillion.

In April, the United States recorded the largest year-on-year inflation increase since 1981, with an 8.5% increase in the consumer price index. The Fed’s own inflation calculations are lower, since they exclude “volatile” food and fuel costs.

Rising rates could push up unemployment in the near term, Powell acknowledged, but said it had to happen to rein in inflation.

“We cannot allow a wage-price spiral to occur,” Powell, referring to the phenomenon where higher wages drive up the prices of goods and services.

“The labor market is extremely tight” he added, pointing out that there were 11.9 million job vacancies and six million Americans looking for work, a ratio of nearly 2:1. He predicted that the unemployment rate “nudge” as more and more Americans return to the workforce.

“There may be pain” for Americans as the Fed brings inflation down to 2%, but not addressing it would be even worse, Powell said, saying everyone would be better off in the medium to long term.

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