The Fed started raising interest rates for the first time in more than three years and shrinking its balance sheet as soon as May

The US Federal Reserve announced on the 16th that it will raise the target range of the federal funds rate by 25 basis points to a level of 0.25% to 0.5%, which is in line with market expectations. It was the first rate hike by the Fed since December 2018. 

Indicators of U.S. economic activity and employment continued to strengthen, the Fed said in a statement after its two-day monetary policy meeting. In recent months, U.S. job growth has been strong and the unemployment rate has fallen sharply. Inflation remains high, reflecting supply and demand imbalances related to the coronavirus pandemic, rising energy prices and broader price pressures. The statement pointed out that the impact of the Russian-Ukrainian conflict on the U.S. economy is highly uncertain, but in the short term, related situations and events may exacerbate upward pressure on inflation and dampen economic activity.  

The Fed seeks to achieve its goals of full employment and longer-term inflation of 2 percent , the statement said . By appropriately tightening its monetary policy stance, the Fed expects inflation to fall back to 2% while the labor market remains strong. In support of these goals, the Fed decided to raise the target range for the federal funds rate to a range between 0.25% and 0.5%, with the expectation that further increases in that target range would be appropriate. At a future meeting, the Fed will begin reducing its holdings of Treasuries, agency bonds and agency mortgage-backed securities.  

On the same day, the Federal Reserve also released a summary of economic forecasts that have attracted much attention from financial markets. The summary shows that the Fed lowered its median GDP growth forecast for this year by 1.2 percentage points to 2.8%, and raised its inflation forecast for this year and the median core PCE price index by 1.4 percentage points to 4.1%. In addition, the dot plot of the rate hike path in the summary shows that Fed officials predict that the federal funds rate will rise to at least 1.875% by the end of 2022, and will rise to about 2.75% by the end of 2023, implying that it will be carried out six times this year. A 25 basis point rate hike, followed by three or four equal rate hikes next year.  

On the issue of shrinking the balance sheet, Federal Reserve interim chairman Powell said at a press conference after the regular monetary policy meeting that Fed officials have made great progress in discussions on shrinking the balance sheet, and will announce the start of shrinking the balance sheet as soon as May, and the speed will be faster than the previous cycle. Powell said that the Fed’s top priority is to restore the inflation rate to 2%, and shrinking the balance sheet is equivalent to raising interest rates in disguise and is an effective tool for tightening monetary policy.  

The Wall Street Journal reported that the Fed’s first interest rate hike in more than three years kicked off multiple subsequent rate hikes, with the goal of preventing the U.S. economy from overheating and controlling inflation that hit a 40-year high. Several investment strategists said that the Fed’s statement and Powell’s press conference were more “hawkish” than the market expected. Due to the uncertainty of geopolitical risks, the Federal Reserve will flexibly adjust its monetary policy stance based on economic data, and it may accelerate policy tightening at any time if necessary.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-fed-started-raising-interest-rates-for-the-first-time-in-more-than-three-years-and-shrinking-its-balance-sheet-as-soon-as-may/
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