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The Fed hikes interest rates by a half-point, intensifying the fight against inflation.

WASHINGTON, D.C. — The Federal Reserve hiked its benchmark interest rate by a half percentage point on Wednesday, the biggest increase since 2000, as it pursues more aggressive measures to combat the greatest inflation in four decades.

After a two-day policy meeting, the Federal Open Market Committee (FOMC), the Fed’s policy-making body, decided to boost the target range for the federal funds rate to 0.75 to 1 percent.

According to the statement, the committee also voted to start selling Treasury securities, agency debt, and agency mortgage-backed securities on June 1.

“While total economic activity fell in the first quarter, household expenditure and business fixed investment remained strong,” the Fed stated. “Recent job increases have been strong, and the unemployment rate has dropped significantly.”

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Fed said, adding that the Russia-Ukraine conflict and related events are putting “additional upward pressure” on inflation and are likely to slow economic activity.

Furthermore, supply chain disruptions are anticipated to be exacerbated by coronavirus disease 2019 (Covid-19)-related lockdowns in China, according to the statement.

The Fed stated, “The Committee is very sensitive to inflation risks.”

The Fed generally raises interest rates by a quarter percentage point, and the recent half-percentage-point boost, along with the Fed’s impending effort to cut its $9 trillion balance sheet, would signal a change to a more aggressive tightening mode.

The Fed’s action was made to combat rising inflation, as fears that high inflation might become entrenched grew.

The consumer price index (CPI) in the United States continued to grow at the fastest annual rate in four decades in March, up 8.5 percent from a year earlier, according to the Labor Department. This followed a 7.9% year-over-year increase in February.

The Fed’s preferred inflation indicator, the personal consumption expenditures (PCE) price index, rose 6.6 percent in March over the previous year, significantly beyond the Fed’s 2-percent objective, according to the Commerce Department.

“The labor market is extremely tight, and inflation is much too high,” Fed Chair Jerome Powell said in a virtual press conference on Wednesday afternoon, adding that the Fed is working “expeditiously” to reduce inflation.

“At the next couple of meetings, there is a broad consensus on the committee that more 50 basis point (interest rate) rises should be on the table,” Powell told reporters.

When asked about the likelihood of a recession, the Fed chair stated that “we have a decent possibility of having a gentle or softish landing or outcome” because individuals and companies are in a good financial position and the labor market is solid.

Noting a supply-demand mismatch in the labor market, the Fed chair stated that its policies would decrease demand, resulting in fewer job openings.

With more people returning to the work market, supply and demand will be restored.

“That would allow us to lower wages and lower inflation without having to weaken the economy, enter a recession, or see unemployment grow significantly. There is a way to get there “he stated

Powell, on the other hand, stated that a soft landing is not guaranteed.

“But I will say that I expect this to be very difficult; it will not be easy,” he remarked.

The FOMC intends to reduce the Fed’s securities holdings over time in a “predictable manner,” according to a separate statement titled Plans for Reducing the Size of the Federal Reserve’s Balance Sheet, primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).

Principal payments from assets held in the SOMA will be reinvested beginning June 1 to the extent that they exceed monthly caps, according to the announcement.

The Treasury securities cap will be established at 30 billion dollars per month at first, then increased to 60 billion dollars per month after three months, according to the statement.

According to the announcement, the cap for agency debt and agency mortgage-backed securities would begin at $17.5 billion each month and grow to $35 billion per month after three months.

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