Market Updates
Fed Takes Two-pronged Approach In Taming Inflation
Brian Turner
04 May, 2022
New York City
The Federal Reserve on Wednesday lifted fed fund rates by 50 basis points and set the new target rate between 0.75% and 1%.
The central bank also proposed a plan to shrink its $9 trillion portfolio of government bonds beginning next month.
The two moves were widely anticipated by the market and stocks rallied after the release of the policy committee meeting statement and the plan.
The focus quickly shifted to the next policy meeting and investors are anticipating more aggressive rate hikes beginning June.
The Fed plans to let some of the maturing bonds roll-off and adjust the amount reinvested in government securities.
The Fed plans to let $30 billion of U.S. Treasury bonds and $17.5 billion of mortgage securities roll off for the next three months and then increase the cap to $60 billion a month.
At the proposed rate of caps, the Fed will shrink its portfolio by less than 10% over a year, if the plan is executed every month.
The 50 basis points is the largest increase that the policy committee has approved since May 2000 when the rates were increased to 6.5% after the collapse of internet stocks and dot com bubble.
Sustained hike in energy and home prices has lifted the consumer price inflation to a 4-decade high of 8.5% in March.
The Fed is hoping that its two-prong approach will cool down inflation and slow down the housing market.
For the year 2022, stocks and bonds have diverged in different directions and the S&P 500 index has fallen nearly 13% and the yield on 10-year U.S. Treasury bonds has jumped to 3%.
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