USA: The Fed raises rates by half a point and will start to reduce its balance sheet


by Howard Schneider and Ann Saphir

WASHINGTON, May 5 (Reuters) – The U.S. Federal Reserve (Fed) on Wednesday raised its main interest rate by half a point, its biggest hike in nearly 22 years, and its chairman called on Americans suffering inflation to hold firm until the central bank takes the necessary measures to stem it.

As expected, the rate target for federal funds (“fed funds”), the main instrument of monetary policy in the United States, was raised to between 0.75% and 1%, and the Fed made it clear that further increases, no doubt of the same magnitude, were to follow.

Its chairman, Jerome Powell, however, clarified at a press conference that rate hikes of three-quarters of a point were not “actively” being considered by members of the Federal Open Market Committee (FOMC).

The central bank also announced that it would start next month to reduce its balance sheet, which represents nearly 9,000 billion dollars (8,530 billion euros) due to the massive purchases of bonds made in recent years to maintain low rates. and support the economy.

This balance sheet reduction will be capped at 47.5 billion per month in June, July and August, then at 95 billion per month from September, the FOMC said.

“It’s very unpleasant,” admitted Jerome Powell about the impact of inflation on American households. “Any economically normal person probably does not have (..) extra means (..) to spend and this immediately affects his daily expenses (..) of gasoline, energy and things of that gender. So we understand the suffering that entails.”

He assured that he and his FOMC colleagues were determined to restore price stability, even if this means raising key rates which affects those of mortgages or car loans.

“So it won’t be pleasant either, but in the end, everyone will be better off (..) with stable prices,” said Jerome Powell.

The Fed chief said the economy remained healthy and was able to withstand the upcoming rate hike, adding that “we have a good chance of avoiding a recession”.

RELAXING YIELDS, DOLLAR DROP, WALL STREET RISE

Despite the contraction of the gross domestic product (GDP) of the United States in the first quarter, “household spending and business investment remain solid. Employment growth has been robust”, explains the FOMC in its press release.

But inflation “remains high” and war in Ukraine and new lockdowns in China threaten to fuel upward pressure on prices, he added, stressing that “the Committee is very attentive to inflationary risks “.

In the markets, Treasury yields headed lower after Jerome Powell’s statements on the scale of the rate hikes to come and, around 1950 GMT, that of two-year securities fell by 13 basis points. at 2.636% while the ten-year yielded three points to 2.9285%.

On Wall Street, the Standard & Poor’s 500 index then gained 3.07% while, on the foreign exchange market, the dollar amplified its decline against the other major currencies (-0.70%), allowing the euro to rally above $1.06 for the first time in a week.

“The market was basically pricing in a 50-50 chance of a 75 basis point rate hike by July (..) and (Powell) pretty much ruled that out,” explained Mazen Issa, senior currency strategist. of TD Securities in New York.

In mid-March, the Fed had raised the target for “fed funds” by a quarter of a point despite the wish of several FOMC members for a larger increase, the majority having favored caution only three weeks after the invasion of Ukraine by Russia.

Inflation has since picked up again as the war sparked by Moscow sent energy and food prices skyrocketing, while the return to lockdowns in several parts of China to combat the resurgence of the COVID outbreak -19 was once again disrupting global supply chains.

At the same time, employment statistics in the United States reflected tensions in the labor market, with the shortage of labor favoring wage increases. (Report Howard Schneider, with Saqib Ahmed in New York, French version Marc Angrand, edited by Jean Terzian)




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