[Comprehensive] US Fed Raises Interest Rates for the First Time in Over 3 Years, Signals 6 More Hikes... "Quantitative Tightening May Start as Early as May"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), raised its benchmark interest rate by 0.25 percentage points on the 16th (local time), marking the first rate hike in 3 years and 3 months. In particular, it signaled a full-scale tightening by indicating that it will raise rates at each of the remaining six meetings this year. The Fed also confirmed that it could begin quantitative tightening (QT), including balance sheet reduction, as early as May.

On the 16th (local time), following the Federal Open Market Committee (FOMC) regular meeting, the Fed announced in a statement that it would raise the benchmark interest rate from the previous 0.00-0.25% range to 0.25-0.50%, an increase of 0.25 percentage points. This is the first rate hike since December 2018, 3 years and 3 months ago.

At the meeting, 8 out of 9 members voted in favor of the rate hike. James Bullard, President of the Federal Reserve Bank of St. Louis, advocated for a 0.5 percentage point increase.

Additionally, through the dot plot showing future rate projections, the Fed forecasted the rate to reach 1.9% by the end of this year. This implies six additional 0.25 percentage point hikes at the remaining FOMC meetings. This confirms that the pace of monetary tightening is accelerating faster than expected in December last year.

Fed Chair Jerome Powell said at the subsequent press conference, "It appears that inflation will take longer than previously expected to return to the 2% target range," noting that inflation risks are more severe than anticipated. When asked what factors determine the pace of Fed’s rate hikes, he replied, "If more aggressive monetary tightening is needed, the Fed can accelerate its plans," adding, "Every meeting is live."

The Fed also indicated that it could begin balance sheet reduction as early as the May FOMC meeting. Chair Powell confirmed, "We expect to announce the start of balance sheet reduction at the next meeting." The Fed’s assets, which were $4.1 trillion in January 2020, surged to nearly $9 trillion due to bond purchases aimed at supplying liquidity to the market during the COVID-19 pandemic.

However, these plans are not finalized. He added, "We are mindful of the broader context of the market and economy when making decisions about rates and the balance sheet," and "We will use our tools to support financial market and macroeconomic stability." Wall Street experts view that reducing the Fed’s assets by $500 billion would have an effect similar to raising rates by 0.25 percentage points.

Chair Powell described the impact of Russia’s invasion of Ukraine on the U.S. economy as "very uncertain," forecasting that "in the short term, it could add upward pressure on inflation and weigh on economic activity." He also said the likelihood of a recession next year has "not particularly increased," and "All signs indicate that the U.S. economy remains strong."

Powell’s remarks on the day were considered to be at the expected level. Earlier, at the March FOMC, Powell had unusually mentioned that a 0.25 percentage point hike would be appropriate.

Following the Fed’s rate hike decision, the New York stock market showed an upward trend. As of 3:36 p.m. Eastern Time, the tech-heavy Nasdaq index was trading 2.82% higher than the previous close. The large-cap S&P 500 index and the Dow Jones Industrial Average were up 1.52% and 0.86%, respectively. In the bond market, the yield on the U.S. 10-year Treasury note reached 2.185%, marking the highest level since 2019.

Meanwhile, at the FOMC, the Fed lowered its U.S. GDP growth forecast for this year from 4.0% to 2.8%. The inflation rate forecast was raised to 4.3%, significantly exceeding the 2% inflation target. The unemployment rate forecast remained unchanged at 3.5%.

This content was produced with the assistance of AI translation services.