The Federal Reserve approved a rare interest rate hike of half a percentage point and announced plans to trim its asset portfolio by $9 trillion starting next month as part of a double effort to reduce inflation, which has reached its highest level in four decades.
The measures, announced after a two-day policy meeting on Wednesday, will raise the central bank’s benchmark federal funds rate to a target range of between 0.75% and 1%.
Together, the moves mark the Fed’s most aggressive monetary policy tightening at a meeting in decades, aimed at rapidly scaling back the economic stimulus that has contributed to rising price pressures. The Fed, which typically raises interest rates in quarter-point increments, last raised rates by half a point in 2000.
The federal rate-setting committee approved the decision unanimously. In a statement, the committee said it “expects continued increases in the target range to be appropriate,” paving the way for another big rate hike at the Fed’s meeting next month.
The statement cited the potential for Covid-related disruptions in China to wreak further havoc on global supply chains that could keep inflation high. “The Committee is very attentive to the risks of inflation,” he said.
Fed officials also finalized plans to begin passively reducing their mammoth holdings of Treasuries and mortgage-backed securities, that is, allowing bonds to mature without reinvesting the proceeds in new ones. securities rather than selling them on the open market.
Authorities will allow up to $30 billion in Treasury bills and $17.5 billion in mortgage bonds to roll each month in June, July and August. After that, they will allow $60 billion in treasury bills and $35 billion in mortgage-backed securities to flow each month.