Fighting Inflation Fed Raises Benchmark Interest Rate By Half Percent, Record In Last 22 Years

JAKARTA – Various efforts have been made by major banks in the US to reduce inflationary fluctuations that have led to the economic crisis. The US Federal Reserve (Fed) on Wednesday May 4 raised its benchmark interest rate by half a percentage point.

It marked the sharpest rate hike since 2000, when it took more aggressive steps to control its highest inflation in four decades.

The Federal Open Market Committee (FOMC), the Fed's policy-making body, decided to raise the target range for the federal funds rate to 0.75 to 1.0 percent, the Fed said in a statement after a two-day policy meeting.

The committee also decided to begin reducing its holdings of government securities and agency debt and mortgage-backed agency securities on June 1, according to the statement.

"Although overall economic activity eased slightly in the first quarter, household spending and business fixed investment remained strong," the Fed said. "Job gains have been strong in recent months, and the unemployment rate has declined substantially."

"Inflation remains high, reflecting the pandemic-related supply and demand imbalance, higher energy prices, and broader price pressures," the Fed said.

They also, added that the Russo-Ukrainian war and related events created "additional upward pressure" on inflation and tended to weigh on economic activity.

In addition, the COVID-19-related lockdown in China is likely to exacerbate supply chain disruptions, the statement read. "The committee is very concerned about inflation risks," the Fed said.

The Fed typically raises interest rates by a quarter of a percentage point, and the newly announced half-point rate hike, along with immediate steps to shrink its $9 trillion balance sheet, would mark a shift to more aggressive tightening modes.

The Fed's decision is aimed at fighting soaring inflation, due to growing concerns that high inflation will take root.

The Labor Department reported that the US consumer price index (CPI) in March continued to rise at its fastest annual pace in four decades, jumping 8.5 percent from a year earlier. That follows a 7.9 percent year-on-year increase in February.

The US personal consumption expenditures (PCE) price index, the Fed's preferred measure of inflation, jumped 6.6 percent in March over the past year, well above the Fed's 2.0 percent inflation target, the Commerce Department reported last week.

"The labor market is very tight, and inflation is too high," Fed Chair Jerome Powell said Wednesday afternoon May 4 at a virtual press conference, noting that the Fed was moving "quickly" to bring inflation back down.

"There is a broad understanding on the committee that an additional 50 basis points (rates) will be discussed at the next several meetings," Powell told reporters.

When asked about the risk of a recession, the Fed chair said that "we have a good chance of getting a soft yield or yield," because households and businesses are in strong financial conditions, and the labor market is very strong.

Noting that there is an imbalance between supply and demand in the labor market, the Fed chairman said his policy would moderate demand, which would help lower job openings. With more people returning to the labor market, supply and demand will be back in balance.

"That would give us the opportunity to lower wages, and lower inflation, without having to slow down the economy and go into a recession, and make unemployment rise materially. There is a way around that," he said.

Meanwhile, major US banks including JPMorgan Chase & Co, Wells Fargo Bank and Citibank have also raised their key interest rates to 4.0 percent, effective Thursday, May 5.

The basic lending rate was raised by 50 basis points, the bank said in a separate statement on Wednesday, May 4.

The decision came after the US Federal Reserve raised its overnight interest rate by half a percentage point. It was the biggest jump in 22 years on Wednesday May 4 and said it would begin shrinking the central bank's $9 trillion asset portfolio next month in a bid to further lower inflation.

The U.S. central bank set its target federal funds rate to a range between 0.75 percent and 1.0 percent in a unanimous decision, with further increases in borrowing costs of possibly similar magnitude likely to follow.