Fed decides on biggest rate hike in over 20 years to tackle inflation

May 05 , 2022. 3 hours ago – 07:17 KYODO NEWS

WASHINGTON – The U.S. Federal Reserve on Wednesday raised key interest rates by half a percentage point, the biggest rate hike in over 20 years as it rushes to address high inflation stemming from Russia’s war in Ukraine and coronavirus pandemic-linked supply chain disruptions.

Upon concluding a two-day meeting of the policy-setting Federal Open Market Committee, the central bank moved as widely expected in deciding to lift its target range for the federal funds rate to 0.75 to 1.00 percent, noting that it is “highly attentive to inflation risks.”

In further monetary policy tightening, the Fed also announced that on June 1 it will start reducing the size of its balance sheet, which has swelled to around $9 trillion due to its asset purchases in support of the pandemic-hit economy.

“Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell told a press conference after the meeting.

When raising the short-term benchmark interest rates, the Fed usually moves the figure a quarter-percentage-point at a time. The last time the central bank raised the rate by half a percentage point was May 2000.

But facing the worst inflation in 40 years, the Fed lifted its rate by 0.25 percentage point in March this year after keeping it at near-zero amid the pandemic, and doubled the size of the hike in its latest meeting.

The U.S. central bank said Wednesday that the surge in prices for crude oil and other commodities resulting from Russia’s invasion of Ukraine is “creating additional upward pressure on inflation” and is “likely to weigh on economic activity.”

Supply chain disruptions are also expected to be exacerbated by ongoing lockdowns in China as it maintains a stringent “zero-COVID” strategy, according to the Fed.

Reaffirming the continuing need to lift interest rates, Powell said there is a broad sense on the committee that additional 0.5 percentage point increases should be “on the table at the next couple of meetings.”

But he added that a 0.75 percentage-point rise is not something the committee is “actively considering.”

Facing the delicate task of bringing down inflation without tipping the world’s largest economy into recession, Powell asserted that “we have a good chance to have a soft, or softish, landing.”

Meanwhile, the prospects of divergence in monetary policy between the Fed and the Bank of Japan, which is sticking with an ultra-easy stance, is putting pressure on the yen against the U.S. dollar, raising concerns for the resource-poor Asian country that relies on energy imports.