The Fed increased its target interest rate by a large three-quarters of a point this Wednesday.
The Fed Open Market Committee, which manages monetary policy, announced a 2.25 percent to 2.5 percent target number for overnight inter-bank funding, up from the 1.50% to 1.75% it proposed last month. The Fed said it would boost the rate it gives on reserve balances to 2.40%.
The Fed was alerted to recent proof that the economy has slowed in its statement.
The Fed went on to say, “Recent indications of spending and production have weakened. Nonetheless, job creation has been strong in recent months, and the rate of unemployment has remained low. Inflation is staying high with higher energy, and food costs, as well as broader price increases.”
The Federal Reserve singled out Russia’s occupation of Ukraine as a factor in inflation.
“The conflict in Ukraine is having a significant human and economic toll. The war and other connected events are putting extra upward pressure on inflation, which is weighing on worldwide economic activity,” the Fed added.
The Federal Funds Rate was raised by another 0.75 percentage points, establishing a new record for consecutive rate hikes in the modern history of interest rate targeting. Before the 1980s, the Fed sought to control money supply growth.
The Federal Reserve announced that it would keep reducing its Treasury securities and agency debt and mortgage-backed security holdings at a rate of $47.5 billion each month through September, when the reduction is expected to reach $95 billion each month.
The Federal Reserve is considering ways to pare down its balance sheet by not taking the place of bonds as they mature, which is known as “rolling off.” The Fed now has almost $9 trillion balance sheet owing to quantitative easing programs enacted after the 2008 financial collapse and the bond purchases it launched when the covid pandemic hit. Because the Fed intends to manage rather than just allow the balance sheet to go down at whatever speed bonds expire, it will continue to be a buyer of bonds for some time.
The Federal Reserve’s economists and officials are divided about the consequences of its large-scale asset buys and the increasing of its balance sheet. Some authorities feel that reducing the Fed’s balance sheet amounts to raising rates, which is another sort of monetary tightening.
The interest rate increase arrives the day before the government is expected to reveal GDP growth rates for the second quarter of 2018. The Wall Street Journal polled economists and found a median estimate of 0.3 percent growth. However, a growing number of experts believe that the economy shrank in the second quarter. On Wednesday, GDPNOW, an Atlanta Fed real-time tracker, indicated that economic activity had decreased by 1.2%.
