MAY 9, 2022 – RATES RISE BY 0.5 PERCENT AS EXPECTED; FED TO REDUCE ASSET HOLDINGS
To slow down inflation, running at a 40-year high, the Federal Reserve raised interest rates last week. Interest rates will go up by 0.5 percent, raising the target range to 0.75%-1%. This is the biggest one-time hike since 2000, and the second of seven rate increases expected for this year. The central bank also announced it will reduce its $9 trillion of asset holdings by $95 billion per month starting June 1.
Inflation, which the Fed has targeted at 2 percent, is currently running at an annual rate of 8.5 percent. This is a result of supply chain issues, post-pandemic spending and government stimulus packages.
Fed Chair Jerome Powell said he is committed to bringing inflation into check, but stated an incremental 0.75 percent is not currently under consideration; however, his wording indicated that additional 0.5 percent increases are possible. Current indicators are interest rates will be in the range of 2.75 to 3 percent by the end of the year. Powell believes the US economy can handle tighter monetary policy, and foresees a “softish” landing despite the rise in rates.