The Fed is signaling more aggressive measures to fight inflation

Federal Reserve officials say they will take a more aggressive approach to combating high inflation in the coming months – actions that will make lending much more expensive for consumers and businesses and increase risks to the economy.

WASHINGTON – Federal Reserve officials say they will take a more aggressive approach to fighting high inflation in the coming months – actions that will make lending much more expensive for consumers and businesses and increase risks to the economy.

Minutes after their policy meeting three weeks ago on Wednesday, Fed officials said aggressive half-year rate hikes, instead of the traditional quarterly hikes – “could be appropriate” several times this year. At last month’s meeting, many Fed policymakers favored a half-point increase, according to the minutes, but were postponed due to uncertainty over Russia’s invasion of Ukraine. Instead, the Fed raised its key short-term interest rate by a quarter and indicated it plans to continue raising interest rates next year.

Minutes also show that the Fed is also close to rapidly shrinking its huge $ 9 trillion bond stock in the coming months, a move that will contribute to higher borrowing costs. Policymakers said they would likely cut their stakes by about $ 95 billion a month – almost double the rate they set five years ago when they last shrunk their balance sheets.

The plan to quickly pull out their bonds marks the latest move by Fed officials to step up their efforts to fight inflation. Prices are rising at the fastest pace in four decades, and officials in recent speeches have expressed growing concern about controlling inflation.

Financial markets are now expecting much sharper growth this year than Fed officials had just signaled at their recent meeting in mid-March.

Higher interest rates from the Fed will increase the cost of borrowing on mortgages, car loans, credit cards and corporate loans. In doing so, the Fed hopes to slow economic growth and raise wages enough to curb high inflation, which has plagued millions of households and posed a serious political threat to President Joe Biden.

Many economists said they were concerned that the Fed had waited too long to start raising interest rates and that policymakers could end up responding so aggressively as to trigger a recession.

President Jerome Powell opened the door two weeks ago to raising interest rates by half a point in the coming meetings, instead of a traditional quarter point. The Fed has not raised interest rates by half a unit since 2000. Lael Brainard, a key member of the Fed’s board, and other officials have also made it clear that such sharp increases are possible. Most economists now expect the Fed to raise interest rates by half a point in May and June.

Speaking on Tuesday, Brainard underlined the Fed’s growing aggression, saying that central bank bonds “will shrink significantly faster” in a “much shorter period” than the last time the Fed cut its balance sheet, from 2017- 2019. at that time, the balance sheet was about $ 4.5 trillion. Now, it is double.

The Fed bought trillion. It also reduced the short-term reference rate to almost zero. Last month, it raised that rate to a range between 0.25% and 0.5%, the first rise in three years.

As a sign of how quickly the Fed is reversing its policy, the last time the Fed bought bonds, there was a three-year gap between when it stopped buying in 2014 and when it started cutting its balance sheet in 2017. Now this change is likely to happen in just three months, economists say.

Brainard’s remarks led to a sharp rise in the interest rate on the 10-year government bond, a key interest rate that affects mortgage rates, business loans and other borrowing costs. On Wednesday, the rate reached 2.6%, from 2.3% just a week earlier, a sharp increase for this percentage. A month ago, it was just 1.7%.

Yields on short-term bonds have skyrocketed, in some cases above 10-year yields, a pattern previously seen as a sign of impending recession. Fed officials, however, say short-term bond yields are not flashing the same warning signs.

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