The US central bank announced a 50-point hike in its key interest rate to 0.5%, the biggest increase in 22 years, while the US Federal Reserve said inflation is still high, reflecting supply and demand imbalances associated with of the corona epidemic and high energy prices, and added that Russia’s attack on Ukraine was causing enormous economic hardship.
Federal Reserve Chairman Jerome Powell made clear that the board agreed that inflation could rise faster and last longer than expected, but stressed that the latest wave of inflation would be temporary.
Powell had expected the inflation rate to rise to 3% yoy this year but then fall sharply in 2022, while a CPI report released last Thursday showed inflation rose to a 13-year high of 5 %.
The Fed’s vote was more aggressive than expected, with 11 of 18 officials expecting at least two interest rate hikes in 2023, up from last March when only seven expected one.
Market Watch, which looks at the global economy, said seven officials are now seeing their first rise next year, up from four in March.
In this context, Powell’s announcement that Fed members are discussing a slowdown in bond buying by the board demonstrated for the first time the board’s intention to tighten monetary policy.
The Federal Reserve buys $80 billion of Treasury bonds and $40 billion of mortgage-backed securities every month, and keeps the benchmark interest rate close to zero, in a coordinated effort to keep financial markets stable and support the economy.
Many economists, including former US Treasury Secretary Larry Summers, believe the Federal Reserve needs to rethink its policy in light of two massive fiscal stimulus plans approved by Congress last December.
