Fed’s 75 basis point increase: first in 28 years

Latest news! US Federal Reserve (fed), raised the base rate by 75 basis points to 1.50-1.75 percent.

Thus, the Fed carried out the sharpest rate increase since 1994.

In the text of the resolution, the Fed emphasized that it has a strong commitment to return to the 2% inflation target.

THE DECISION WAS TAKEN 10 VOTES TO 1

In the statement made by the Fed, it was stated that the decision to raise the interest rate was taken by a 10-1 vote, and Kansas City Fed Chair Esther George voted to raise it by 50 basis points.

Emphasizing that the Federal Open Market Committee (FOMC) aims to achieve maximum employment and 2% inflation in the long term, it was reported that it was decided to increase the federal funds rate to the range of 1.50-1.75% to support these targets, and continued increases were felt to be appropriate.

The 75 basis point hike, which was decided by the bank at its June meeting, was the fastest rate hike since 1994.

ACCELERATED INFLATION HAS INCREASED PRESSURE IN THE FED

In the last quarter of 2021, the tone of the Fed’s monetary policy began to change with the high inflationary pressure that came with the rapid economic recovery following the epidemic of the new type of coronavirus (Covid-19) in the US.

The Fed, which began to slow down the pace of asset purchases with its November meeting last year, completed its asset purchase operation in March and began raising interest rates. While the Bank decided to raise interest rates for the first time since 2018, with a 25 basis point increase at its March meeting, it had made the fastest rate hike since 2000, with a 50 basis point increase at its May meeting.

Starting in June, the Fed started the balance sheet shrinkage, which is another step in the normalization of post-pandemic policy.

Inflation, which continued its upward trajectory with the effect of the Russia-Ukraine War and the Covid-19 epidemic control policies triggered by the Omicron variant in China, increased supply chain problems, further increased the pressure on the Fed. .

US inflation reached 8.6% in May, the highest level since December 1981.

Following the two-day Federal Open Market Committee (FOMC) meeting, the Fed said in a statement that general economic activity appeared to have recovered after the first-quarter decline.

In the statement, it was stated that employment gains have been strong in recent months and the unemployment rate remains low.

Noting that inflation remains high, reflecting epidemic-related supply and demand imbalances, rising energy prices and broader price pressures, Russia’s attack on Ukraine has caused enormous humanitarian and economic hardship.

In the statement, it was highlighted that the war and related events exerted additional upward pressure on inflation and pressure on global economic activity.

HAS BEEN REINFORCED TO BE EXTREMELY CAREFUL WITH INFLATION RISKS

Noting that the quarantine measures taken against the Covid-19 epidemic in China are also likely to worsen supply chain disruptions, he said the Committee was very cautious about inflation risks.

In the statement, it was informed that, in addition to the 75 basis point interest rate hike, the Committee will continue to reduce its Treasury and mortgage-backed securities in line with the balance sheet reduction plan announced in May.

In the statement, which states that the committee is determined to reduce inflation to the 2 percent target, it reiterated that while the appropriate monetary policy stance is being evaluated, the effects of information on the economic outlook will continue to be monitored. .

In the communiqué, it was noted that the Committee will be ready to adjust the monetary policy stance accordingly should risks arise that could prevent the Committee from achieving its targets.

INFLATION ESTIMATE INCREASES, GROWTH EXPECTATIONS LOWER

In announcing its forecasts for the economy, the Fed raised its inflation forecast for this year, while lowering its growth expectations.

According to the Fed’s forecast, the inflation forecast for this year has been raised from 4.3% to 5.2%. Inflation forecasts were cut from 2.7% to 2.6% in 2023 and from 2.3% to 2.2% in 2024.

Forecasts for core inflation, which excludes variable energy and food prices, also increased from 4.1% to 4.3% for this year and from 2.6% to 2.7% for 2023, while by 2.3% for 2024. left.

The growth forecast for the US economy for this year was reduced from 2.8% to 1.7%. The country’s economic growth forecast for 2023 was also reduced from 2.2% to 1.7%, and the expectation for 2024 was reduced from 2% to 1.9%. The long-term growth expectation for the US economy was maintained at 1.8%.

Forecasts for the unemployment rate also increase from 3.5% to 3.7% this year, from 3.5% to 3.9% for 2023 and from 3.6% to 4.1% for 2024.

The median expectation for the financing rate increased from 1.9% to 3.4% in 2022, from 2.8% to 3.8% in 2023 and from 2.8% to 3.4% in 2024. . Expected average long-term interest rates increased from 2.4% to 2.5%.

Recovering from the Covid-19 crisis, the US economy grew 5.7% last year, the strongest since 1984.

“WE CAN INCREASE ANOTHER 75 BASE POINTS IN JULY”

Fed Chair Jerome Powell said in a statement after the decision: “A 50 or 75 basis point increase is likely at our next meeting.”

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