[FOMC] US Signals Tightening, Raises Interest Rates for the First Time in 3 Years and 3 Months

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The United States central bank, the Federal Reserve (Fed), raised its benchmark interest rate for the first time in 3 years and 3 months. It signaled the start of a full-scale tightening by indicating additional hikes in the remaining six meetings this year. Quantitative tightening (QT), including balance sheet reduction, is also expected to begin as early as May.

On the 16th (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would raise the target range for the policy rate from 0.00-0.25% to 0.25-0.50%. As Fed Chair Jerome Powell had mentioned earlier, the Fed took a ‘baby step’ by raising the rate by 0.25 percentage points. This is the first rate hike since December 2018.

The Fed’s dot plot, which shows future rate projections, forecasted the rate to reach 1.9% by the end of this year. This implies six additional 0.25 percentage point hikes in the remaining FOMC meetings. Compared to the December dot plot’s projection of three hikes this year, the pace of tightening has accelerated significantly.

In a press conference immediately after, Chair Powell cited the highest inflation in the U.S. in 40 years as the reason for tightening, saying, "It is time to raise rates and begin balance sheet reduction." He added, "It will likely take longer than previously expected to return to the 2% target range," and signaled a hawkish stance by stating, "We are prepared to do whatever it takes to stabilize." This leaves room not only for rate hikes at every meeting but also for a so-called ‘big step’ increase of 0.50 percentage points.

The timing of the balance sheet reduction, which attracted market attention, was also specified. Chair Powell said, "There has been significant progress at this meeting," and "It could start as early as the next FOMC meeting (May 3-4)."

Regarding the impact of Russia’s invasion of Ukraine on the U.S. economy, he described it as "very uncertain." However, on the possibility of a recession next year, he firmly drew a line, saying, "It has not particularly increased. The U.S. economy remains strong."

The Fed’s tightening move was judged to be based on confidence in the U.S. economy, leading to a rally in the New York stock market. The Nasdaq index, centered on technology stocks, closed up 3.77% from the previous session. In the bond market, the yield on the U.S. 10-year Treasury note rose to 2.185%, marking the highest level since 2019. With FOMC uncertainties resolved, the KOSPI in the Korean market surged early on the 17th, recovering to the 2700 level.