USA: The Fed will raise rates by half a point and begin to reduce the balance, Market news

Howard Schneider and Anne Sapphire

WASHINGTON, May 4 (Reuters) – The US Federal Reserve (Fed) on Wednesday raised its key interest rate by half a point, the biggest increase in nearly 22 years, and its chairman urged Americans suffering from inflation to stay with the central bank. takes the necessary measures to stop it.

As expected, the target rate for federal funds (“Federal Funds”), the main instrument of monetary policy in the United States, was raised to 0.75-1%, and the Fed made it clear that further increases, undoubtedly the same amount, had follow.

However, its chairman Jerome Powell told a news conference that the three-quarter rate increase was not “actively” considered by members of the Federal Open Market Committee (FOMC).

The central bank also announced next month that it will start cutting its balance sheet to nearly $ 9 trillion (8,530 billion euros) due to massive bond purchases made in recent years to support low rates and support the economy.

This reduction in the balance will be limited to 47.5 billion per month in June, July and August, and then to 95 billion per month from September, according to FOMC.

“It’s very unpleasant,” Jerome Powell said of the impact of inflation on American households. “Any economically normal person probably does not have (..) extra money (..) for expenses, and this immediately affects his daily expenses (..) for gasoline, energy and things of this sex. That’s why we understand what suffering entails. “

He assured that he and his colleagues from FOMC are determined to restore price stability, even if it means raising key rates, which will affect mortgages or car loans.

“So it won’t be pleasant either, but in the end everyone will be better (..) with stable prices,” said Jerome Powell.

The Fed chief said the economy remained healthy and able to withstand future rate hikes, adding that “we have a good chance of avoiding a recession.”

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Despite the United States’ gross domestic product (GDP) decline in the first quarter, “household spending and business investment remain stable. Employment growth has been stable,” FOMC said in a press release.

But inflation “remains high” and the war in Ukraine and new quarantines in China threaten to increase pressure on prices, he added, stressing that “the Committee is very attentive to inflation risks.”

Treasury bond yields declined after Jerome Powell’s statements about future spreads, and in about 1950, Greenwich’s yields on two-year securities fell 13 basis points to 2.636 percent, compared with three points on ten-year yields. up to 2.9285%.

Then on Wall Street, the Standard & Poor’s 500 rose 3.07%, while in the foreign exchange market, the dollar intensified its decline against other major currencies (-0.70%), allowing the euro to rise above $ 1.06 for the first time. week.

“The market was mostly estimating prices with a 50-50 chance of a 75-point increase by July (..), and (Powell) almost ruled it out,” said Mazen Issa, senior currency strategist at TD Securities in New York. .

In mid-March, the Fed raised the target for the “composite funds” by a quarter, despite the desire of several FOMC members for a larger increase, the majority called for caution only three weeks after Russia’s invasion of Ukraine.

Since then, inflation has risen again as the Moscow war sparked a sharp rise in energy and food prices, and a return to quarantine in several parts of China to combat a resumption of the COVID-19 outbreak has again disrupted global supply chains.

At the same time, employment statistics in the United States reflect labor market tensions as labor shortages contribute to higher wages. (Howard Schneider’s report with Sakib Ahmed in New York, French version by Marc Angran, edited by Jean Terzian)