MNI: Fed Hikes Rates By 50BP, To Begin Asset Runoff June 1

The Federal Reserve on Wednesday raised interest rates by a half percentage point, the largest increase in 22 years, and said it will begin reducing its USD9 trillion balance sheet starting June 1.

The unanimous decision boosts the target range for the federal funds rate, the overnight lending rate between banks, to 0.75% to 1%.

“Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong,” the statement said, repeating that inflation remains elevated.

The Fed also added a sentence about the prospect that China's covid lockdowns will worsen supply issues. "The Committee is highly attentive to inflation risks," the Fed said.

PRESS CONFERENCE

Wall Street is keenly focused on how hawkish Fed Chair Jerome Powell will be at his post-meeting press conference. In particular, traders are looking to see whether Powell rules out even more aggressive rate rises in the future.

As telegraphed in the Fed’s March meeting minutes, the central bank will begin shrinking its balance sheet starting June 1, setting an initial monthly cap of USD30 billion for Treasury securities that will increase to USD60 billion per month after three months. The Fed will allow runoff of its agency MBS holdings with a starting cap of USD17.5 billion per month that will rise to USD 35 billion after three months.

MNI reported last week the Fed was set to embark on a series of rate increases that will bring borrowing costs to levels more consistent with what it sees as neutral.

U.S. inflation has taken off far beyond Fed expectations, with the consumer price index surging 8.5% in the year to March.