Fed hikes rates in bid to slow inflation

STORY: The Federal Reserve on Wednesday raised interests by half a percentage point - the biggest single rate-hike since the year 2000 - and said it would begin trimming its bond holdings next month.

The combined measures - hiking rates and selling bonds - significantly slash the sort of economic aid that the Fed has relied on to boost growth, but that's a risk that Chairman Jay Powell is willing to take to tame what he sees as an even greater threat: surging inflation.

"I'd like to take this opportunity to speak directly to the American people. Inflation is much too high, and we understand the hardship it is causing. And we're moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses."

Powell telegraphed Wednesday's move long in advance, and financial markets have priced in further rate hikes through this year and into the next.

The impacts of these moves might be felt everywhere from the housing market to the jobs market, where higher rates could stymie hiring and business investment. But that's the trade-off: the Fed hopes that by raising borrowing costs, U.S. consumers might slow spending, and help bring down price inflation that is now more than three times the Fed's 2% target.

But the central bank is trying to thread a needle: it needs to avoid raising rates too high or too fast which could trip up the economy, and raise the risk of recession.

Those fears grew after U.S. GDP shrank 1.4 percent in the first quarter of 2022.

Chief Investment Strategist Sam Stovall of CFRA Research says the Fed needs to move quickly to choke off inflation, without strangling the overall economy:

"What they're hoping to accomplish is to engineer a soft landing. By that, I mean, what we saw in 1994. Seven rate increases in 13 months, did not throw the economy into recession, but rather caused it to slow, and so that's what they're hoping to do this time as well."

And while the Fed is expected to raise rates more quickly now in a dash to quash soaring prices, inflation will also depend on things beyond the Fed's control: The ongoing pandemic, the war in Ukraine, and supply problems related to both.

"The economy is strong and is well-positioned to handle tighter monetary policy. So, but, I'll say, I do expect that this will be very challenging, it's not going to be easy, and it may well depend, of course, on events that are not under our control."

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