The Federal Reserve implemented a monumental 0.75% interest rate hike over renewed fears that elevated inflation, supply and demand imbalances, higher energy prices, and broader economic pressures will persist.
The Federal Open Market Committee (FOMC), which determines the direction of monetary policy in the U.S., concluded its 2-day policy meeting Wednesday.
The 75 basis points mark the most aggressive rate hike since 1994 as rates increase at the fastest pace in nearly three decades.
Federal Reserve Chair Jerome Powell considers the move a necessary measure to bring inflation under control.
“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” said Powell. “The Fed will “continue to communicate our intentions as clearly as we can.”
The Fed’s aggressive move is a response to Friday’s CPI report, which showed the Consumer Price Index increased 8.6%, the largest 12-month increase since the period ending December 1982, according to JPMorgan Chase.
Barry Gilbert, asset allocation strategist for LPL Financial, believes Powell demonstrated resolve against inflation at Wednesday’s meeting.
“After Friday’s CPI report, the Fed needed to prove once again it was serious about fighting inflation,” said Gilbert. “The more aggressive stance can still be consistent with a softish landing for the economy, but the path is getting narrower. We still think the Fed may be able to back off from its new forecast of a 3.4% benchmark rate at the end of the year, but for now, the priority is showing resolve.”
The Committee claims it is highly attentive to inflation risks and is strongly committed to returning inflation to its 2% objective.
In an official FOMC statement, the Committee cites the invasion of Ukraine by Russia and the COVID-related lockdowns in China as reasons for the upward pressure on inflation and the exacerbating supply chain issues.
To reduce the size of the Federal Reserve’s balance sheet, FOMC members wrote they plan to raise the target range for the federal funds rate between 1.5% and 1.75%. In addition, the Committee said it will continue reducing its holding of Treasury securities, agency debt, and mortgage-backed securities.
Priya Misra, head of interest-rate strategy at TD Securities, is cautioning investors and warns of high volatility until inflation reaches its peak.
Misra stated, “Today, everyone is cheering, but if inflation has not peaked, we will have to go through the stress of the last few days all over again.”