Federal Reserve Chairman Jerome Powell allayed some concerns about an impending economic recession after he dismissed the possibility of an even bigger rate hike than the Federal Reserve announced Wednesday.
Bond yields fell and stocks recorded their best day since 2020 after Powell helped calm investors who feared the Fed’s aggressive tightening of monetary policy to contain its highest inflation in 40 years could send the economy into recession. end up.
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In comments after the Federal Open Market Committee voted to raise its key interest rate by 50 basis points for the first time since 2000, Powell rejected any suggestion that a mega-large 75 basis point hike would be on the table at future meetings. The S&P 500 rose 3% after his comments, the biggest jump since May 2020.
“A 75 basis point increase is not something the committee is actively considering,” Powell told reporters at the news conference after the meeting.
His comments came after policymakers voted unanimously to raise the key benchmark interest rate by half a point to a range between 0.75% and 1.0%, the highest since the pandemic began two years ago, as they want to satisfy consumer demand. curb to reduce rising prices.
The Fed also announced it will begin reducing its massive $9 trillion balance sheet, which nearly doubled in size during the pandemic as the central bank bought mortgage-backed securities and other treasuries to continue borrowing cheaply. In a plan outlined Wednesday, the Fed said it will begin deleveraging its balance sheet on June 1 at an initial combined monthly rate of $47.5 billion, a move that will further tighten lending to US households. It will raise the run-off rate to $95 billion in three months.
Collectively, the moves mark the most aggressive monetary policy tightening in decades as the Fed rushes to catch up on inflation, which hit a new 40-year high in March.
“Inflation is way too high,” Powell told reporters at a news conference afterwards. “We understand the hardship it causes, and we’re acting quickly to bring it back. We have both the tools we need and the determination we need to restore price stability on behalf of American families and businesses.”
While the moves were widely anticipated, investors feared Powell would telegraph even stronger rate hikes to markets in upcoming meetings as it rushes to catch up with inflation. Bank of America, Deutsche Bank and Fannie Mae were among the Wall Street firms that predicted a recession in the next two years before the meeting began this week.
Powell acknowledged that there could be some “pain” in reducing inflation and curbing demand, but resisted the idea of an impending recession, citing the job market and strong consumer spending as bright spots in the economy.
“It’s a strong economy,” he said. “There’s nothing to indicate it’s close or vulnerable to a recession.”
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Still, there are no guarantees and economists have said the Fed faces a tough road as it tries to traverse the needle between cooling demand and crushing economic growth.
†[Powell] spoke an optimistic tone about the plan to raise interest rates, reduce job openings and keep unemployment relatively low,” said Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance. “However, it will be quite a challenge to do , and we are less optimistic about the Fed’s ability to achieve this ‘soft landing’ while recognizing that they should try.”