Federal Reserve raises rates by 50 basis points and warns that tightening will not be kind – monetary policy

The US central bank announced a 50 basis point hike in the federal funds rate, which is therefore moving into a range of 0.75% to 1%.

After raising its key rate in March for the first time since December 2018, by 25 basis points, the Fed has now raised its rate by 50 basis points, something the market had already expected.

The Fed has five more monetary policy meetings scheduled for this year – June, July, September, November and December – and its chair, Jerome Powell, has been saying there could be an increase in key interest rates in each of them, if this proves necessary. There are even market watchers talking about the possibility of additional hikes outside this calendar.

The Fed’s main goal, with this tougher stance, is to combat the nation’s high inflation, which is currently at its highest level in 40 years.

The Federal Open Market Committee (FOMC) said after this two-day meeting that it will remain “very attentive” to inflation data.

Following the announcement of the Federal Reserve’s decisions, Powell spoke, stressing that “controlling inflation is essential to the labor market.”

According to the Fed chair, another 50 basis point increase is on the table at the next central bank meeting. However, Powell said a 75 basis point increase is not something he is considering.

Since the dot.com bubble burst – 22 years ago – the US Federal Reserve has not raised its policy rate by 50 points.

The Fed chair also said he expects more Americans to enter the workforce.

Powell also said that tightening Fed policies “won’t be fun” but “it would be best for everyone”. It ensures that nothing shows that the US is close to or in danger of recession – despite the economy contracting in the first quarter, according to preliminary data.

Balance sheet reduction begins on June 1

The Fed also outlined a plan to reduce its balance sheet, which begins to recover by 47.5 billion dollars per month as of June 1, and after three months this withdrawal rate rises to 95 billion per month.

It should be noted that in the scope of stimulating the economy in the period of the epidemic, the Federal Reserve began to spend billions of dollars in asset purchases, which in the meantime began to decline in stages (the so-called “tapping”), and now it is time to start losing weight in equilibrium.