Friday, September 22, 2023

The US Federal Reserve gives the green light to the biggest interest rate hike in 22 years due to inflation

The Federal Reserve (Fed) of the United States announced this Wednesday a rise in interest rates of half a point with the aim of fighting runaway inflation.

With this rise -which is double the one carried out in March-, the official interest rate of the world’s largest economy falls to a range between 0.75% and 1%. This is the biggest rise in the price of money since 2000, 22 years ago. Since then, rate hikes have always been limited to 25 basis point increments.

Likewise, the monetary authority has agreed to begin reducing the size of its balance sheet as of June, at a rate of 37.5 billion dollars per month for an initial period of three months. After that time, the volume of reductions will rise.

The agency explained that even though economic activity slowed down during the first quarter, household spending and business investment have performed well. In addition, the increase in employment has been “robust” in recent months.

In addition to deciding the biggest rise in interest rates in the last 22 years, the Fed has included in its monetary policy statement that “it will be appropriate” to make further increases in the price of money.

The other great measure adopted by the monetary authority at its meeting this Wednesday has been to define the plan to reduce its balance sheet, which shot up to nine trillion dollars (8.5 trillion euros) due to asset purchases made as a measure against the Covid-19 pandemic.

From June, the maturities of the assets will be reinvested except for a volume of 47,500 million dollars (45,000 million euros). Specifically, the Fed will stop reinvesting 30,000 million (28,427 million euros) of Treasury bonds and 17,500 million (16,582 million euros) of mortgage securitizations.

These reductions will be temporary and for three months. After those three months, from September, the monthly reduction will be 95,000 million (90,017 million euros) per month: 60,000 million (56,853 million euros) of Treasury bonds and 35,000 million (33,164 million euros) of securitizations.

In any case, the Fed has clarified that it is “prepared” to adjust the details of its balance sheet reduction based on economic and financial developments.

Unemployment and inflation, the main concerns

The US labor market created 431,000 non-farm jobs last March. On its side, unemployment fell to 3.6 percent, thus maintaining the labor recovery in a sustained manner.

The country’s economy experienced a decline of 0.4 percent in the first quarter of 2022, according to the first estimate of the data released by the Government Economic Analysis Office.

On its side, the personal consumption expenditure price index, the variable preferred by the Fed to monitor inflation, stood at 6.6 percent in March compared to the same month last year. The monthly rate in the first month of the year was 0.9 percent, four tenths more than the previous month.

The underlying variable, which excludes energy and food prices from its calculation due to their greater volatility, stood at 0.3 percent, the same figure as in February, while the annual rate stood at 5 .2 percent, one-tenth less. The next FOMC meeting of the Federal Reserve will be on June 15, 2022.


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