The Fed Officially Raises Benchmark Interest Rates by 50 Basis Points

JAKARTA, KOMPAS.com – The central bank of the United States (US) Federal Reserve or The Fed officially raised the benchmark interest rate by 50 basis points or 0.5 percent, which was announced on Wednesday (4/5/2022) morning local time.

The increase was the largest increase in two decades made to cope with a surge in inflation which was the highest in 40 years.

“Inflation is too high and we understand the difficulties it causes. We moved quickly to bring it back down. We are very committed to restoring price stability,” Fed Chair Jerome Powell said during a news conference citing CNBC.

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Along with the increase in interest rates, the US central bank also indicated it would begin to reduce its holdings of assets on its balance sheet by 9 trillion US dollars. The Fed has been buying bonds to keep interest rates low and cash flow flowing during the pandemic, but spikes in prices are forcing the central bank to adopt tighter monetary policy.

The rate hike announced on Wednesday will also push the federal funds rate to a range of 0.75 percent to 1 percent. The Fed’s decision to raise interest rates was responded positively by the US stock market or Wall Street which jumped higher, while US Treasury yields fell slightly.

Powell said the market now expects the central bank to continue raising rates aggressively in the coming months. However, Powell said the 50 basis point hike would need to be discussed at the next meeting, and Powell seemed to ignore the possibility of the Fed becoming more hawkish.

“Seventy-five basis points is not something the committee is actively considering. The American economy is very strong and in a good position to tackle tighter monetary policy,” Powell said.

With the increase in the benchmark interest rate by the Fed, the balance sheet reduction occurs gradually. The Fed allows a capped rate of yield on bonds maturing revolving monthly while reinvesting the remainder.

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