On Wednesday, the Federal Reserve raised interest rates by half a percentage point and announced a plan to reduce its bond holdings in an attempt to fight the ongoing inflation crisis that began shortly after Democrat President Joe Biden took office.
“Wednesday’s move marked the Fed’s largest interest rate increase since 2000, and by shrinking its nearly $9 trillion balance sheet at the same time, the Fed is rapidly withdrawing support from the economy. Together, the policies are likely to ricochet through markets and the economy as money becomes more expensive to borrow,” The New York Times reported. “The quick pullback of monetary help is a sign that the central bank is getting serious about cooling down the economy and job market as rapid inflation persists and as officials grow nervous that it could become more permanent. Prices have been climbing at the fastest pace in 40 years for months now.”
In a statement, the Federal Open Market Committee explained that inflation “remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” and the “invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.”
The Federal Reserve also announced that it plans to shrink its balance sheet starting in June by reducing “the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Beginning on June 1, principal payments from securities held in the SOMA will be reinvested to the extent that they exceed monthly caps.”
“Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime,” the statement added. “The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.”