The US Federal Reserve approved a half-percentage-point interest rate increase on Wednesday to stem the highest inflation rate in 40 years.
This came as the second hike in two months and the biggest increase in 22 years.
The last rate hike of 50 basis point was in 2000. The Fed usually lifts interest rates in incremental move of 25 basis point.
The latest move by Fed was in line with market expectations and announced after a two-day policy meeting. It will raise the central bank’s benchmark federal funds rate to a target range between 0.75 percent and 1 percent.
As prices began to creep up last spring, Fed officials dismissed them as “transitory” and waited to start raising interest rates until mid-March.
While he underlined the central bank’s commitment to bringing inflation down, Federal Reserve Chair Jerome Powell indicated at a news conference after the Fed meeting that bigger rate hikes are “not something the [Fed] is actively considering”.
“There is a broad consensus (among Fed policymakers) that additional (half-point) rate increases should be on the table at the next couple of meetings,” he said. Powell also noted that he believes the Fed has “a good chance to restore price stability without a recession”, saying, “It’s a strong economy. Nothing about it says it’s close to recession.”
Those comments were enough to rally US stock markets Wednesday to their best day in two years as they calmed investors who had begun to worry that the fight against inflation might push the economy into a recession.
The Dow Jones Industrial Average closed 932 points higher, rising 2.8 percent. That was the index’s best day since November 9, 2020. The S&P 500 was up by 3 percent, its best performance since May 18, 2020. The Nasdaq Composite rose 3.2 percent, its best day since Feb 24, 2022.
“It’s certainly heady days when the market doesn’t blink at the most aggressive rate hike in 22 years, but keep in mind this was extremely well-telegraphed and priced in,” Mike Loewengart, managing director, investment strategy at E-Trade from Morgan Stanley, told US News.
“Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” Powell was quoted as saying.
“We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses,” he added.
The bank also outlined a program in which it eventually will be reducing its $9 trillion of portfolio bond holdings by $95 billion a month. Both were unanimously approved by the rate-setting Federal Open Market Committee.
Reversing the portfolio expansion serves as an additional way to remove stimulus and lift borrowing costs.
“The Committee is highly attentive to inflation risks,” it said, citing the Ukraine-Russia conflict and other factors that are likely to keep inflation elevated.
