Fed raises 0.25%p… Baby step preview within the year
Quantitative tightening starts in May… Low possibility of economic recession
The U.S. Federal Reserve raised its key interest rate by 0.25 percentage points on the 16th for the first time in three years and three months.
In particular, it signaled the start of a full-fledged interest rate hike, suggesting that interest rates will be raised at every six meetings remaining this year. This is in response to the recognition that high inflation is concerned amidst the employment stability, and it is interpreted that the focus will be on price control in the future.
The Fed announced in a statement after the two-day Federal Open Market Committee meeting that it would raise interest rates by 0.25 percentage points from the current 0.00-0.25% to 0.25-0.50%.
The Fed raised interest rates gradually from 2015 to 2018, with the last increase in December 2018.
Then, in July 2019, the interest rate was lowered again, and in March 2020, the interest rate was drastically lowered to near zero in order to respond to the novel coronavirus infection pandemic.
According to the Feds separate release of a dotplot, an indicator of future interest rate forecasts by FOMC members, it expected the rate to reach 1.9% by the end of this year.
At the remaining six FOMC meetings this year, if you take the baby step, which increases by 0.25 percentage points, it means that all six FOMC meetings are expected to increase.
In September of last year, only half of the Feds members expected one or two rate hikes this year, and in December of that year, most considered two or four hikes. There are also speculations that the Fed will raise interest rates at least five times this year.
The Feds interest rate hike seems to reflect its strong will to control inflation as jobs are stable and the recent inflation rate is so severe that it hit the highest level in 40 years.
In fact, the Fed raised its inflation forecast for this year to 4.3% this year, far exceeding the 2.6% forecast in December last year. This is significantly higher than the Feds inflation target of 2%.
On the other hand, the real GDP forecast was 2.8%, down 1.2 percentage points from the previous year, but the unemployment rate forecast was maintained at 3.5%.
The Fed said in a statement that job growth has been strong in recent months and unemployment has fallen, while inflation has remained on an upward trend, reflecting a supply-demand mismatch associated with the pandemic, high energy prices and widespread inflationary pressures.
In particular, the Fed predicted that Russias invasion of Ukraine would cause enormous human and economic hardship, and the impact on the US economy was very uncertain, but expected that it would create additional inflationary pressure and burden economic activities in the short term.
The Fed also said at its upcoming meeting that it expects to begin reducing its holdings of government bonds, institutional debt and mortgage-backed securities, signaling that it will soon begin accelerating quantitative austerity.
Fed Chairman Jerome Powell said at a press conference that he could start cutting assets as early as May.
From 2020, the Federal Reserve has purchased US Treasury bonds and MBS in order to respond to the economic downturn caused by the spread of COVID-19, and currently holds $9 trillion in assets.
Eight out of nine members who exercised their voting rights voted in favor of the rate hike. Louis Fed President James Bullard insisted on a 0.5 percentage point increase.