U.S Federal Reserve Raised Key Rate, Kicking Off Most Aggressive Policy Tightening in Decades

The Federal Reserve on Wednesday raised short-term interest rates for the first time since 2018 to tackle with high inflationary pressure, as well as putting an end to extraordinary pandemic era support.

Overnight, Jerome Powell – Chair of the FED lifted its benchmark Federal Funds rate by 0.25%, to a target range between 0.25% – 0.50%. Policy makers voted 8-1 to lift their key rate.

The move underlined the most aggressive tightening campaign in decades, as Powell assure the Americans that the economy won’t slip into recession.

After the announcement, Powell told reporters that the inflation in too high and the labor market is over heated and price stability is a “pre-condition” for the U.S. central bank as the economy struggles with hottest price pressure in 40 years.

“As I looked around the table at today’s meeting, I saw a committee that’s acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that,” Powell told reporters Wednesday following a two-day meeting of the Federal Open Market Committee.

“The American economy is very strong and well positioned to handle tighter monetary policy.”

The policy makers also forecast a sequence of rates hike finishing this year at 1.9% and taking the rate to 2.8% by the end of 2023.

The FED was clear in its tone, if inflation do not come down, the agency is ready to be more hawkish.

Among members of the monetary committee, seven policy makers wants even faster pace in hiking rates this year which raises the prospect of half-point move in the future.

“The Fed has now waged a war on inflation,” said Diane Swonk, chief economist at Grant Thornton, as reported by Bloomberg.

“They want to bring inflation down with the most aggressive surge in rates in decades.”

The FED noted it remains “highly uncertain” on Russian invasion of Ukraine, which would put near-term upward pressure on inflation and hurt growth of the economy.

“The history of being able to guide inflation down from 40-year highs with maximum employment suggests a smooth landing is very difficult to achieve,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities Inc, as reported by Bloomberg.

“At some point they will face the tradeoff between pushing unemployment higher or accepting higher inflation.”

Jerome Powell in his speech noted job openings near record highs point to a labor market that is “tight to an unhealthy level.”

“There is misalignment of demand and supply, particularly in the labor market, and that is leading to wages that are moving up that are not consistent with 2% inflation over time,” Powell said.