Federal Reserve Chairman Jerome Powell He eased some fears of a looming economic recession after he dismissed the prospect of a rate hike greater than that announced by the US central bank on Wednesday.
Bond yields fell and stocks had their best day since 2020 after Powell helped calm investors, who were worried that the Fed’s aggressive tightening of monetary policy in order to tame the hottest inflation in 40 years could push the economy into recession.
In comments after the Federal Open Market Committee voted to raise the key interest rate by 50 basis points for the first time since 2000, Powell rejected any suggestion that a massive 75 basis point increase was on the table in 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 press conference after the meeting.
His comments came after policymakers voted unanimously to raise the key benchmark rate by half a point to a range of 0.75% to 1.0%, the highest level since the pandemic began two years ago, as they look to rein in consumer demand in order to bring down high prices. .
The Fed also announced that it would start shrinking its massive $9 trillion balance sheet, which has nearly doubled in size during the pandemic as the central bank has bought mortgage-backed securities and other Treasuries to keep borrowing cheap. In a plan outlined Wednesday, the Fed signaled that it would begin winding down the balance sheet on June 1 at an initial aggregate monthly pace of $47.5 billion, a move that will further tighten credit for American households. The flow rate will increase to $95 billion over three months.
Collectively, they represent the tightest steps in monetary policy in decades, as the Federal Reserve races to keep pace with inflation, which reached a 40-year high in March.
“Inflation is very high,” Powell told reporters at a news conference after the meeting. “We understand the difficulties it causes, and we are moving quickly to bring them down again. We have both the tools we need and the resolve it takes to restore price stability on behalf of American families and businesses.”
Although these moves were widely expected, investors were concerned that Powell might telegraph markets even steeper rate hikes in upcoming meetings as he races to catch up with inflation. Bank of America, Deutsche Bank and Fannie Mae were among the Wall Street firms that forecast a recession in the next two years before the meeting began this week.
Powell acknowledged that there could be some “pain associated with” lowering inflation and curbing demand, but rejected the idea of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy.
“It’s a strong economy,” he said. “Nothing about him suggests that he is close to or prone to stagnation.”
However, there are no guarantees and economists say the Fed faces a tough road ahead as it carefully attempts to link slowing demand to a crushing of economic growth.
“[Powell] Chris Zaccarelli, chief investment officer at the Association of Independent Advisors, said: “They came on a bullish tone about a plan to raise interest rates, cut jobs and keep unemployment relatively low. However, it will be very difficult to do, and we are less optimistic about the Bank’s ability to do so. The Federal Reserve is committed to making this “soft landing,” recognizing the need to try.”
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