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HomeEconomyFed implements first half-point interest rate rise since 2000

Fed implements first half-point interest rate rise since 2000

The US Federal Reserve raised its benchmark policy rate by half a percentage point for the first time since 2000 and unveiled plans to shrink its $9tn balance sheet as it embraces a more aggressive approach to tackling high inflation.

At the end of its two-day policy meeting on Wednesday, the Federal Open Market Committee lifted the target range of the federal funds rate to a range of 0.75 per cent to 1 per cent. It is the first time since 2006 that the central bank has implemented rate increases at back-to-back meetings.

At its March meeting, the Fed raised rates a quarter of a percentage point from the near-zero level where they had hovered since the onset of the pandemic.

Since then, top officials have backed a much more rapid withdrawal of the pandemic-era stimulus in light of one of the tightest labour markets in history and signs that price pressures are becoming entrenched.

In a statement released on Wednesday, the US central bank said it expected that “ongoing increases in the target range will be appropriate”, suggesting the Fed will implement multiple half-point rate rises this year.

The committee said it was “highly attentive” to soaring inflation but warned of further upward pressure on prices stemming from supply chain bottlenecks caused by the war in Ukraine and Covid lockdowns in China.

The decision marks the latest step by the Fed to move monetary policy to a so-called neutral position that neither speeds up nor slows down economic activity.

Officials have suggested a neutral federal funds rate is between 2 and 3 per cent, but many economists believe it is much higher, given how much inflation has overshot the Fed’s 2 per cent target. Core inflation, as measured by the central bank’s preferred personal consumption expenditures price index, reached 5.2 per cent in March compared with the previous year.

Additional half-point rate rises are now expected in short order, with further adjustments likely in June and July. If the Fed then raises rates by just a quarter-point at each of the remaining meetings in September, November and December, the fed funds rate would hover between 2.5 and 2.75 per cent by the end of the year.

Fed officials argue the US economy is strong enough to withstand much tighter monetary policy without falling into a recession, an outcome that Treasury secretary Janet Yellen said was possible but would be tricky to pull off.

At an event on Wednesday, the former Fed chair said the central bank will need to be “skillful and also lucky” to achieve a so-called soft landing.

The Fed on Wednesday also confirmed its plans to shrink its portfolio of Treasuries and agency mortgage-backed securities, which has ballooned since early 2020 as it hoovered up bonds to support the economy.

The central bank will begin reducing its holdings in June through a process called run-off whereby it stops reinvesting the proceeds of maturing securities.



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