For the first time in 22 years, the Federal Reserve is raising interest rates by as much as half a percentage point in a move designed to curb inflation.
All twelve members of the Fed’s Open Market Committee have given their approval to the move. Even more, Fed Chairman Jerome Powell suggested that additional half percentage point rate hikes may well be considered in the months ahead, depending upon the inflation outlook.
“Inflation is much too high, and we understand the hardship it is causing,” Powell remarked in a press conference. “We are moving expeditiously to bring it back down.”
Added Powell: “We have both the tools we need and resolve to restore price stability on behalf of American families and businesses.”
The last time that the Federal Reserve raised rates this high was in May of 2002. Normally, the Fed raises rates in quarter percentage point increments.
Along with raising rates, the Fed also announced plans to reduce its current $9 trillion asset portfolio beginning in June. The Fed’s holdings greatly expanded as a result of its purchase of bonds as part of a stimulus strategy during the Covid 10 economic shutdown.
Those two steps, notes the Wall Street Journal, “mark the most aggressive Fed tightening of monetary policy at one meeting in decades, aimed at rapidly reducing the economic stimulus that has contributed to rising price pressures.”
The rise in interest rates is expected to increase credit card costs, home mortgages, and small business loans, among other credit offerings.
In an analysis, Robert Dietz, chief economist with the National Association of Home Builders, noted: “The economy will undoubtedly slow with this expected path of policy. Higher interest rates are also reducing housing affordability and pricing prospective buyers out of an already tight property market.”
But Dietz added that while the Fed can cool the demand side of the economy, “Additional output on the supply side is required in order to tame the growth in costs that we are seeing in housing and other sectors of the economy.”
The site MarketWatch is predicting that as the Fed shrinks its mortgage-backed securities holdings, there will be an impact on liquidity in the mortgage markets. Lenders, says the site, will need to “make up the difference by raising rates.”
By Garry Boulard
