Fed raises rates by half a percentage point — the biggest hike in two

WASHINGTON — The Federal Reserve on Wednesday raised its benchmark interest rate by half a percentage point as the most aggressive step yet in its battle against generational highs in inflation.

“Inflation is much too high and we understand the hardship it is causing, we’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell said during a news conference which he started by saying he wanted to “directly address the American people.”

Along with the move higher in rates, the central bank indicated it will begin reducing asset holdings on its $9 trillion balance sheet. The Fed had been buying bonds to keep interest rates low and money flowing through the economy, but the surge in prices has necessitated a dramatic rethink in monetary policy.

The plan outlined Wednesday will see the balance sheet reduction happen in phases as the Fed will allow a capped level of proceeds from maturing bonds to roll off each month while reinvesting the rest. Starting June 1, the plan will see $30 billion of Treasurys and $17.5 billion on mortgage-backed securities roll off. After three months, the cap for Treasurys will increase to $60 billion and $35 billion for mortgages.

Those numbers were mostly in line with discussions at the last Fed meeting as described in minutes from the session, though there were some expectations that the increase in the caps would be more gradual.

Markets were prepared for both moves but nonetheless have been volatile throughout the year. Investors have relied on the Fed as an active partner in making sure markets function well, but the inflation surge has necessitated tightening.

Stocks rose following the announcement while Treasury yields backed off their earlier highs.

Markets now expect the central bank to continue raising rates aggressively in the coming months, with a possible 75-basis-point hike on the table for June. Wednesday’s rate hike will push the federal funds rate to a range of 0.75%-1%, and current market pricing has the rate rising to 3%-3.25% by year’s end, according to CME Group data.

“No surprises on our end,” said , Collin Martin, fixed income strategist at Charles Schwab. “We’re a little bit less aggressive on our expectations than the markets are. Do think another 50-basis-point increase in June seems likely. … We think inflation is close to peaking. If that shows some signs of peaking and declines later in the year, that gives the Fed a little leeway to slow down on such an aggressive pace.”

Wednesday’s statement noted that economic activity “edged down in the first quarter” but noted that “household spending and business fixed investment remained strong.” Inflation “remains elevated,” the statement said.

Finally, the statement addressed the Covid outbreak in China and the government’s attempts to address the situation.

“In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks,” the statement said.

Though…