The US Federal Open Market Committee (FOMC) concluded two days of meetings on Wednesday with the long-awaited announcement of an interest rate hike of 50 basis points, or 0.5%. This is the second of seven rate adjustments planned for this year. In March, the Federal Reserve raised its benchmark interest rate by 25 basis points, or 0.25%, marking the first upward adjustment since 2018.
Markets were braced for Wednesday’s rally, which was the biggest since 2000, so the immediate reaction is expected to be muted. Fed Chairman Jerome Powell hinted at a 50 basis point adjustment at a debate hosted by the International Monetary Fund in April.
*FED RAISES RATES 50 BPS, TO START RUNOFF JUNE 1 AT $47.5B/MTH
*FED EXPECTS `ONGOING’ INCREASES IN RATES WILL BE APPROPRIATE
*FED: RUNOFF PACE TO RISE TO MAXIMUM $95B/MTH AFTER THREE MONTHS— Christophe Barraud (@C_Barraud) May 4, 2022
*THE FED RAISES RATES BY 50 PB, TO BEGIN THE REDUCTION OF THE BALANCE ON JUNE 1 TO 47.5B/MONTH.
*FED EXPECTS “CONTINUED” RATE RISES TO BE ADEQUATE.
*FED: PACE OF BALANCE SHEET WILL INCREASE TO MAXIMUM OF $95 BILLION PER MONTH AFTER THREE MONTHS.
Since the Federal Reserve revealed its plans to start raising interest rates in November, the price of Bitcoin (BTC) has fallen by more than 40%. BTC hovered around $41,000 following the FOMC decision in March. It is now trading at about $39,000.
The FOMC move is an attempt to combat rising inflation, which reached 8.5% in March, the highest in four decades. Many economists have criticized the Fed for being too slow in its fight against inflation, making it prone to overreacting. The Fed has kept interest rates at zero to support the economy during the COVID-19 pandemic, but wrongly ruled out a pick-up in inflation in 2021 as “temporary”. Now, the continuation of the war in Ukraine and the new wave of COVID lockdowns in China have created even greater inflationary pressure around the world.
In its economic policy statement on Wednesday, the Fed also announced that it will start selling part of its balance sheet of bonds and mortgage-backed securities, the size of which has doubled to $9 trillion since the pandemic began. At best, this will cause a temporary shock to financial markets, but could have longer-term negative effects.
In a speech at the White House early on Wednesday, US President Joe Biden said the Treasury Department will reduce the national debt this quarter, which will also help ease inflation. Treasury Secretary Janet Yellen, at an event hosted by The Wall Street Journal on Wednesday, said she expects continued economic growth this year and a “soft landing” in inflation without entering a recession.
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