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The Fed raises interest rates by 1/2 point and begins shrinking its $ 9 trillion bond stockpile in June

Initially, the Fed plans to reduce its holdings by $ 47.5 billion a month. Three months later, the Fed will grow to $ 95 billion a month with asset cuts. This is a move that could deplete liquidity from money markets over the next few years.

As expected, the central bank has raised the federal funds rate from 0.75% to 1%, and a series of increases are expected. The vote was unanimous.

This is the second rate hike this year and the largest since 2000.

“Central banks can’t do much to ease price pressures this year, but don’t expect inflation to continue to rise,” said Avery Schenfeld, chief economist at CIBC Economics. I want to convince Americans. ” “Hiking more aggressively in advance is part of that message.”

U.S. stocks
DJIA,
+ 1.46%

SPX,
+ 1.42%

And bonds
TMUBMUSD10Y,
2.961%

The trading on Wednesday didn’t change much. Rising interest rates hit the US stock market in early 2022 and questioned whether it could regain momentum.

The Fed aims to raise the short-term interest rate on the benchmark to more than 2.5% by the end of the year after keeping the benchmark near zero for most of the pandemics. Banks have lowered interest rates to support the economic downturn after the 2020 virus outbreak.

The Fed’s balance sheet, on the other hand, doubled during the pandemic and succeeded in reducing long-term interest rates. The goal was to help the economy by making it cheaper for consumers to buy homes and cars, and for businesses to take out loans.

A central bank statement after a regular two-day strategic session expressed greater concern about inflation.

The Federal Reserve said a Covid-related blockade in China could prevent companies from getting enough material and exacerbate supply chain bottlenecks that played a major role in today’s high-inflation episodes. Said there is.

“The Commission is very careful about inflation risk,” the Fed’s statement said.

According to economists, the Fed’s easy approach in the early days of the pandemic, coupled with massive government stimulus, contributed to the surge in inflation.

The Living expenses have skyrocketed 8.5% over the past year, According to the Consumer Price Index. By comparison, in the decade preceding the pandemic, inflation has risen by an average of less than 1.4% per year.

Another major factor, according to analysts, is the global supply shortage after the United States and other countries have begun to recover from the pandemic.

Companies couldn’t cope with the sudden flood of demand from government stimuli because they didn’t have enough materials to produce all the goods and services their customers wanted.

In any case, the Fed is now ready to act swiftly to slow down demand and raise interest rates to reverse the storm surge of inflation.

Before the announcement of the Federal Reserve Board Financial futures market forecastBy the end of 2022, the central bank will raise short-term interest rates to 3%, surpassing the Fed’s latest forecast of about 2.5%.

Investors also believed that the Fed would raise 75 basis points at its June meeting. This is its scale increase since 1994.

However, the number of economists and former Fed officials is increasing. Worried that central banks are likely to cause a recession in the United States By raising interest rates very rapidly to calm inflation. In the post-WWII era, the Fed has never controlled inflation to such a high level without causing a recession.

Powell and other Fed officials claim that they can achieve the so-called soft landing, central bank term for lowering inflation while maintaining economic expansion.

Overall, the economy grew rapidly after a temporary recession due to the coronavirus in the spring of 2020, driven by strong consumer spending. Economic activity “descended in the first quarter, but the Fed said,” household spending and corporate fixed investment remained strong. “

The toughest labor market in decades has also helped the United States regain employment for almost every 22 million people lost in the early days of the pandemic, producing the largest wage increase in 40 years. It allowed Americans to use more.

“In recent months, employment growth has been strong and unemployment has fallen sharply,” the Federal Reserve said.

But soaring inflation is beginning to stave off the economy.

Businesses and consumers are facing significant price increases, and customers are beginning to hesitate to pay extra. Staple foods such as homes, cars, electronics, groceries and gas are much more expensive.

Labor shortages are also scarce, and the Fed is increasingly concerned that it could drive inflation.

The worst scenario is a wage-price spiral like the 1970s, where workers, consumers and businesses all expect prices to continue to rise, and chronic high inflation is a self-fulfilling prophecy. Will be.

Federal leaders argue that the current situation is not as it was in the 1970s, and that inflation can be curbed.

The futures market seems to believe that the Fed will succeed. Bond futures have not fallen to levels that suggest continued high inflation.

Central banks aim to slow inflation to less than 3% by early next year. Its long-term target is an inflation rate of 2% to 2.5%.

The Fed raises interest rates by 1/2 point and begins shrinking its $ 9 trillion bond stockpile in June

Source link The Fed raises interest rates by 1/2 point and begins shrinking its $ 9 trillion bond stockpile in June

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