Federal Reserve Chairman Jerome Powell speaks after Fed hikes interest rates

Federal Reserve Chairman Jerome Powell speaks after Fed hikes interest rates

The Federal Reserve on Wednesday raised its benchmark interest rate by a half point for the first time in two decades as policymakers intensify their fight to cool red-hot inflation, a move that threatens to slow U.S. economic growth and exacerbate financial pressure on Americans.  

The widely anticipated move – that the Fed would raise rates by 50 basis points – comes as officials face mounting pressure to move more aggressively to cool demand and slow rising consumer prices, which hit a 40-year high in March. 

HOW THE FEDERAL RESERVE MISSED THE MARK ON SURGING INFLATION

Policymakers voted unanimously in favor of the rate half-point move, which put the key benchmark federal fund rate at a range between 0.75% to 1.0%, the highest since the pandemic began two years ago.

"With appropriate firming in the stance of monetary policy, the committee expects inflation to return to its 2 percent objective and the labor market to remain strong," the Fed said in its post-meeting statement. It noted the committee anticipates "that ongoing increases in the target range will be appropriate."

The Fed also announced that it will start reducing its massive $9 trillion balance sheet, which nearly doubled in size during the pandemic as the central bank bought mortgage-backed securities and other Treasurys to keep borrowing cheap. In a plan outlined Wednesday, the Fed indicated that it will begin winding down the balance sheet on June 1 at an initial combined monthly pace of $47.5 billion, a move that will further tighten credit for U.S. households. It will increase the run-off rate to $95 billion over three months.

The question now is whether the Fed can successfully engineer the elusive soft landing – the sweet spot between tamping down demand to cool inflation without sending the economy into a downturn. Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending

There are growing fears on Wall Street that central bank policymakers will fail to do so: Goldman Sachs, Bank of America and Deutsche Bank are among the firms forecasting a recession within the next two years.

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Economic growth is already slowing, although consumer spending and business investment remain strong: Last week, the Bureau of Labor Statistics reported that the economy unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the U.S. economy was still deep in the throes of the COVID-induced recession. 

This is a developing story. Please check back for updates.