At the previous interest rate decision meeting in March, the Fed raised the key interest rate by 25 basis points, which has stood at 0.25 percent since March 2020. Now, after its monetary policy meeting in May, the Fed has already announced a 50-point increase, raising the key dollar rate to around 1 per cent. The central bank also said that
the continuous increase in the target band will continue to be “adequate”.
In the explanatory memorandum to the Fed’s decision, although economic activity declined overall in the first quarter, household spending and business fixed investment remained strong.
Inflation remains high
Job creation has been strong in recent months and the unemployment rate has fallen significantly. Inflation remains high, reflecting pandemic supply and demand imbalances, higher energy prices and more general price pressures. The committee indicated that
in the longer term, it aims to reach an inflation target of around 2% with maximum employment.
They pointed out that the effects of the Russian attack on Ukraine on the US economy are extremely uncertain. The invasion and related events are putting further upward pressure on inflation and are likely to hamper economic activity. In addition, Chinese shortages related to the Covid epidemic are likely to exacerbate supply chain disruptions, all of which call for close attention to inflation risks.
In its explanatory memorandum, the Fed further states that in assessing the appropriate direction of monetary policy, the Committee will continue to monitor the impact of incoming information on the economic outlook. The Committee is also ready to adjust monetary policy stance as necessary in the event of risks to the achievement of the set targets.
The board also decided to begin reducing the $ 9 trillion in assets on the Federal Reserve’s balance sheet on June 1. The plan will begin with $ 30 billion a month in treasury bills and $ 17.5 billion in mortgage-backed securities, to $ 60 billion and $ 35 billion in sales, respectively.
They were raised as expected, but they could not rejoice in the stock market
Fed President Jerome Powell announced back in April that aggressive interest rate hikes could take place next month, and he was already talking about the possibility of a 50 basis point raise.
Already the previous rate hike in March, as well as Powell’s said announcement, had a big impact on the operation of U.S. stock markets. Now that the unprecedented raise has taken place, it will probably be even more so.
(Cover photo: Jerome Powell, Governor of the US Federal Reserve, May 4, 2022. Photo: Al Drago / Bloomberg / Getty Images)