Citing high inflation, the US Federal Reserve has raised its base interest rate by 50 basis points, or 0.5%, and announced it would be selling off some assets from its $9 trillion balance sheet. The rate hike is the highest since May 2000, when the dot-com stock bubble burst.
“Inflation is much too high,” Fed chair Jerome Powell said on Wednesday afternoon, adding that “we have both the tools we need and the resolve it will take to bring it down.”
However, Powell noted, the Fed’s policies can only impact the demand side of things and not supply disruptions, which have been “longer-lasting than anticipated.” He blamed the supply problems on Covid-19 lockdowns in China and the conflict in Ukraine.
The Fed is also “significantly reducing the size of our balance sheet,” mainly by selling securities holdings over time. Starting on June 1, principal payments from securities held in the System Open Market Account (SOMA) will be reinvested if they exceed $30 billion per month. That cap will increase to $60 billion per month by September. For agency debt and mortgage-backed securities, the initial cap will be $17.5 billion per month, doubling to $35 billion after three months. The Fed has an estimated $9 trillion balance sheet.