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Interest rates in the United States were raised by 75 basis points, or three-quarters of a percentage point, by the Federal Reserve on Wednesday. It is the biggest rate increase in 28 years, and it is part of a larger effort to combat rising inflation, which has roiled the economy and markets, from stocks and bonds to cryptocurrencies.
According to a statement released by the Federal Open Market Committee (FOMC), which sets the Fed's monetary policy, the central bank will continue to shrink its balance sheet at the rate announced in May.
According to the Fed, the Fed Funds rate, which is the rate at which commercial banks can borrow and lend their excess reserves to one another overnight, will rise to a range of 1.5 percent -1.75 percent. According to Goldman Sachs, bond traders are pricing in a range of 3.25 percent to 3.5 percent by the end of the year, implying an unusually rapid and harsh pace of monetary tightening.
"The current picture is plain to see," Federal Reserve Chair Jerome Powell said after the decision was announced at a press conference on Wednesday. "The labor market is extremely tight, and inflation is much too high."
The last time the Fed raised its benchmark rate was in 1994, when it increased it by 0.75 percentage point. Powell stated that the US central bank will not "declare victory" until "compelling evidence" of lower inflation is seen.
Markets began reacting to the possibility of a faster rate hike in the days leading up to this week's Fed meeting, given that May's Consumer Price Index measuring inflation came in hotter than expected, at a new four-decade high. The closed-door meeting began on Tuesday and ended on Wednesday at 2 p.m. ET with the release of the statement.
"Markets loathe uncertainty and unpredictability," according to Josh Olszewicz, Valkyrie's head of research. "A decrease in downward volatility will only likely be achieved with a pause or reversal of the current Fed policy and direction."
About an hour after the meeting, Bitcoin (BTC) was trading at $21,444, up from $21,076 when the decision was announced. In the days leading up to the meeting, most analysts had already factored in the increase.
In a statement released on Wednesday, the Fed stated, "Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the [coronavirus] pandemic, higher energy prices, and broader price pressures."
Powell had ruled out the possibility of a 75 basis point hike during his May press conference, saying that it is "not something that the committee is actively considering." Instead, central bankers suggested two 50-basis-point rate hikes in June and July.
However, the situation changed after the most recent Consumer Price Index report revealed an acceleration in inflation to 8.6%, rather than the expected slowdown. Powell said at his most recent press conference that if inflation pressures did not "abate" and "come down," the Fed would "consider moving more aggressively."
Instead of waiting another six weeks for the next meeting, Powell said Wednesday that last week's inflation surprise required "strong action at this meeting."
Powell said, "We decided we needed to go ahead, and so we did. We came to the view that we’d like to do a little more front-end loading on that ."
In addition to the statement, the Fed also released revised quarterly economic projections, or "dot plot," which show Fed officials' projections for the key short-term interest rate.
The fund's rate is expected to rise to 3.4 percent in 2022 and 3.8 percent in 2023, according to members.
By fLEXI tEAM