As expected, the Federal Reserve has bolstered its key rate by 75 basis points, bringing it to 3.00%-3.25% on Wednesday, its highest point since 2008, as the central bank struggles to tame inflation. That makes it the third straight rate increase of that magnitude.
Its job is not yet done. The Federal Open Market Committee “anticipates that ongoing increases in the target range will be appropriate.” It will also continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as previously described in its plan to shrink its balance sheet.
By raising the cost of borrowing, the central bank intends to reduce demand to bring it more in balance with demand. When supply and demand are more aligned, then price increases should recede.
The committee repeated its commitment to return inflation to its 2% goal. “Recent indicators point to modest growth in spending and production,” the FOMC’s statement said. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
As has been the case since late February, the war in the Ukraine is creating additional upward pressure on inflation and weighing on global economic activity, it added.
Chair Jerome Powell will provide more explanation at the 2:30 PM ET press conference.
The stock markets turned to red after the announcement, with the Nasdaq slipping 0.5%, the S&P 500 off 0.4%, and the Dow dipping 0.5%. The 10-year Treasury yield spiked to 3.613%, compared with 3.568% before the rate hike.
Developing…check back for updates.
Last week, the Consumer Price Index in August rose 8.3% from a year ago, higher than the 8.1% increase expected, and down slightly from the 8.5% Y/Y jump in July.