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• The interest rate will now range between 0.25%-0.5%
• Core inflation outlook rose to 4.1% while overall inflation was up by 4.3%
The US Federal Reserve raised the short-term benchmark interest rate for the first time in three years by a quarter percentage point or 25 basis points on Wednesday.
The Federal Open Market Committee (FOMC) has kept the benchmark interest rate anchored near zero since the beginning of the COVID-19 pandemic. The Fed’s decision will now throw the rate between 0.25%-0.5%.
The Fed’s move corresponds with a hike in the prime rate and will immediately raise the financing costs for many forms of consumer borrowing and credit.
The central bank has been hinting at increasing the interest rates for a long while. In the FOMC’s last meeting officials indicated that they would initiate the pull back on some of the stimulus provided by the central bank during the financial crisis.
The committee will hike the interest rates at each of the six remaining meetings this year, pointing to a consensus funds rate of 1.9% by year’s end. This figure is higher than that indicated in December by a full percentage point.
The committee also indicated three more hikes in 2023.
The rate hike was approved with only one dissent. St. Louis Fed President James Bullard wanted a 50-basis-point increase.
The FOMC indicated that the central bank “expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”
In the press conference, Fed Chair Jerome Powell hinted, that the central bank would reduce the asset holdings on its nearly $9 trillion balance sheet at its next policy meeting in May.
Powell also told the reporters that the economy was very strong, with healthy growth expected, despite higher oil prices and the uncertain nature of any potential financial spillover from Russia’s invasion of Ukraine.
Inflation outlook
The Fed lifted its 2022 inflation outlook with core inflation rising at 4.1% and overall inflation up by 4.3%, in 2022. This is way more than the 3.5% forecast for the core personal consumption expenditures (PCE) price index and the 2.7% projection officials offered in December.
In the press conference, Powell told the reporters that the Fed expected inflation to return to 2%, but rather slowly, he indicated no looming recession risks.
“As we emphasize in our policy statement, with appropriate firming in the stance of monetary policy, we expect inflation to return to 2%, while the labor market remains strong,” he said.
In January, inflation rose 6.1% from a year earlier, whereas core inflation, including food and energy, jumped up to 5.2%.
Market reaction
Stocks wobbled on Wednesday as investors paid rapt attention to Federal Reserve Chair’s news conference.
The Dow turned negative on the day after the Fed made the announcement but quickly rose 331 points, or 1%, to 33,891. The S&P 500 gained 70 points, or 1.7%, to trade around 4,331, while the Nasdaq Composite Index rose 381 points, or 3%, to 13,332.
Technology stocks jumped after the Fed’s announcement with Meta Platforms rising by nearly 4%, while Amazon and Netflix each gained more than 2%.
The yield on the 10-year Treasury note rose 3 basis points to 2.19%, after the Fed decision. Yields and debt prices move opposite each other.
(With Inputs from the Federal Reserve)