Overnight, as widely expected, the US Federal Reserve lifted its benchmark interest rate, the target federal funds rate, by half a percentage point, to a range of 0.75 per cent–1 per cent, to fight a 40-year high in inflation.
Fed Chair Jerome Powell said the central bank was ready to approve half-percentage-point rate hikes at upcoming policy meetings in June and July.
Current market pricing implies that the rate will rise to a range of 2.75 per cent–3 per cent by year’s end.
The Fed also indicated it will begin reducing asset holdings on its US$9 trillion ($12.3 trillion) balance sheet, implying the start of “quantitative tightening”.
For two years after the onset of the COVID-19 pandemic, the Fed bought more than US$4 trillion ($5.5 trillion) worth of assets, mostly US Treasury bonds and bills, and mortgage-backed securities, to help stimulate the economy.
The Fed finally stopped purchasing bonds in March as the central bank began to pivot toward slowing inflation; now, it is starting the reversal, to take money out of the financial system.
US stock markets jumped following the announcement, with investors prepared to bet that the Fed can slow inflation without causing a recession.
The S&P 500 index surged 3.0%, the 30-stock Dow Jones Industrial Average gained 2.8% and the tech bellwether, the Nasdaq Composite Index, streeted the other two with a 3.2% rise.
