After two days of meetings and great expectations from the market and financial operators, The Federal Reserve (Fed) – the central bank of the United States – confirmed the tightening of monetary policy by raising rates by 75 basis points.
This is the biggest rate hike since 1994 and another jump in its interest rate decisions, which in March this year were 25 basis points, whereas at the last meeting, they were half a point.
During his press conference, Fed Chairman Jerome Powell mentioned that while a hike of this magnitude is “unusually large” and he doesn’t expect it to be common in the coming, “a rise of 50 bps or 75 bps seems more likely for the next meeting” in July.
However, he insisted that the consequences of the conflict between Russia and Ukraine have made the inflationary environment more difficult than it was 4 or 5 months ago, thus necessitating monetary action of today.
“We are not trying to induce a recession now, to be clear. We are trying to achieve 2% inflation, consistent with the strength of the labor market,” Powell added.
As the Federal Open Market Committee reported in its statement, the decision was made almost unanimously, with only one vote against and “seeks to achieve maximum employment and inflation at a rate of 2% in the long term”. In support of these projects, the Committee decided to raise the federal funds rate range to between 1.5% and 1.75% and anticipated that continued increases in the target range would be appropriate.
The decision confirms economists’ expectations, which pointed to a more restrictive monetary policy after the announcement last week that inflation had registered a maximum in 40 years and reached 8.6% year on year in May.
Projections for 2022
Along with rising interest rates, The Fed forecast US gross domestic product (GDP) growth of 1.7% this year, which will remain the same in 2023 and increase slightly to 1.9% in 2024. At the same time, inflation would be 5.2% in 2022, 2.6% next year and 2.2% in 2024.
In their press release, the monetary authorities mention that “They are very mindful of inflationary risks,” which are coming under additional pressure from the Russian invasion of Ukraine. They also believe that supply chain disruptions will increase, due to lockdowns in China related to Covid-19
Regarding the Committee’s upcoming meetings and the economic outlook, they added that they are ready to adjust the monetary policy stance, if necessary, if risks arise that prevent achieving the objective of 2% inflation.
“The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflationary pressures and inflation expectations, as well as financial and international developments,” they said.
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