The Federal Reserve raised short-term interest rates 0.5%
In an effort to stem rapidly rising inflation, the Federal Reserve raised short-term interest rates by 0.5%.
The central bank suggested further interest rate hikes are likely this year as it attempts to remove itself from the easy-money policies it used to boost the economy during the pandemic.
The 0.5% increase is the biggest increase made in a single meeting since May 2000. In the last 20 years, the Fed has opted to raise interest rates in increments of 0.25%, with the latest move illustrating how concerned the bank is about inflation.
“The committee is highly attentive to inflation risks,” the FOMC said in its updated policy statement.
The Fed is targeting interest rates in a range between 0.75% and 1.00%, with some Fed officials advocating for raising the target closer to 2.5% by the end of the year.
Each time the Federal Reserve raises rates, it hits the economy in the form of of higher interest rates on credit cards, mortgages, and business loans. Since the Fed’s first interest rate hike in March, 30-year fixed mortgage rates have risen by a full percentage point to more than 5%.
The statement from the central bank also noted it is carefully watching geopolitical risks, including shutdowns in China that are likely to make supply chain disruptions worse. It is also monitoring the economic implications of the invastion of Ukraine by Russia, which may add more inflationary pressures.
The decision was unanimously agreed to among the voting members of the committee.
In addition to the rate hike, the policy-setting Federal Open Market Committee also detailed plans on unwinding its nearly $9 trillion balance sheet.
Because the duration-based securities ultimately mature, the Fed has maintained its asset holdings by reinvesting principal payments back into similar securities.
The central bank announced Wednesday that beginning June 1, it will allow up to $47.5 billion a month — $30 billion in U.S. Treasuries and $17.5 billion in mortgage-backed securities — to roll off its balance sheet.
The Fed says the process will allow it to reduce its $9 trillion in holdings, although the central bank has not clarified how small it will allow its balance sheet to shrink.
The Fed’s next meeting will take place June 14 and 15.