The Federal Reserve made its largest rate hike in nearly three decades Wednesday, and signaled sharper increases over the coming months, sending Treasuries yields higher and stocks lower.
Updated at 2:43 pm EST
The Federal Reserve made its largest rate hike in nearly three decades Wednesday, and signaled sharper increases over the coming months, as the central bank scrambles to catch-up with the fastest domestic inflation in more than forty years.
Fed Chairman Jerome Powell, however, said he didn’t expect outsized rate hikes to be a “common” tool going forward, although he didn’t completely discount the possibility of a similar-sized move in July.
The Fed lifted its Fed Funds rate by 75 basis points, the biggest since 1994, to a range of 1.5% to 1.75%, and said near-term rate moves would be needed in order to combat the faster since the early 1980s.
The Fed also lifted its forecasts for U.S. unemployment, to a rate of 3.7% from a prior forecast of 3.5%, while cutting its 2022 GDP growth estimate to 1.7%, well shy of its previous indication of 2.8%.
Inflation, the Fed said, will slow to 5.2% by the end of the year, but that forecast is much higher than its previous estimate of 4.3%. CPI will slow again sharply, the Fed said, to 2.6% in 2023.
The central bank also reiterated its plan to reduce its $8.9 trillion balance sheet, with $47.5 billion in sales — officially starting today — capped at $95 billion per month. The sales will be comprised of $60 billion in Treasury bonds and $35 billion in mortgage bonds. That a pace is around twice as fast as the Fed’s prior balance sheet run-off in 2017.
“Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low,” the Fed said in its official statement. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
“The Committee decided to raise the target range for the federal funds rate … and will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May.”
U.S. stocks pared earlier gains following the Fed decision, with the Dow Jones Industrial Average marked 440 points higher on the session and the S&P 500 rising 79 point. Benchmark 10-year Treasury note yields, meanwhile edged 3 basis points lower to 3.381%.
The U.S. dollar index, meanwhile, rose to a fresh 20-year high against a basket of its global peers to trade at 105.685 in the immediate wake of the Fed announcement.
The CME Group’s FedWatch tool already suggests at least a 93.4% chance of another 75 basis point hike in July, while 2-year note yields fell to 3.249% as Fed Chair Jerome Powell prepared to speak to the media in Washington.
The Atlanta Federal Reserve’s GDPNow forecasting tool, a real-time benchmark, suggests U.S. economic growth has now stalled completely, following on from the Commerce Department’s second estimate of first quarter growth which showed a contraction of 1.5%, the first in two years.
U.S. retail sales fell last month May, Commerce Department indicated Wednesday, as consumers pulled back on discretionary spending amid the fastest inflation in four decades and record high gas prices.
May retail sales fell 0.3% from the previous month to a collective $672.9 billion, the Commerce Department said, well shy of the Street consensus forecast of a 0.2% gain and snapping a fourth month run of consecutive gains
