Fed Authorizes Biggest Interest Rate Hike In 22 Years To Fight Inflation Amid 'Violent' Stock Sell-Off

Topline

The Federal Reserve on Wednesday announced the largest interest rate hike since the turn of the century and unveiled additional details about how it will further ease monetary stimulus, escalating its fight against the highest inflation rate in 40 years as the stock market reels over the potential implications for economic growth.

The Federal Reserve on Wednesday raised interest rates by 50 basis points—the most since May 2000.

Key Facts

Following the conclusion of its two-day policy meeting, the Federal Open Markets Committee said Wednesday afternoon it would raise the federal funds rate, which is the target interest rate at which commercial banks borrow and lend reserves, by 50 basis points to a target range of 0.75% to 1%—a widely expected move following a hike of 25 basis points on March 16.

The increase—the largest since May 2000—was approved unanimously and comes after Fed Chair Jerome Powell acknowledged inflation is “much too high” in late March and pledged to “move expeditiously… to restore price stability.”

For months, Fed policymakers signaled they would begin raising rates in March, but the pace and intensity of expected rate hikes has grown amid relentlessly strong inflation and criticism that the central bank waited too long to start raising rates.

In a bid to further ease its economic stimulus measures, the Fed announced it would begin reducing the size of its balance sheet by as much as $47.5 billion per month beginning on June 1, and as much as $95 billion per month starting in September.

Despite a choppy day of trading, stocks ticked up immediately after the announcement, with the Dow Jones Industrial Average climbing 138 points, or 0.4%, to 33,266 points by 2:10 p.m. ET, while the S&P also added 0.4%.

Crucial Quote

“Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially,” Fed officials said Wednesday, citing ongoing price pressure as a lingering economic concern and adding that they expect inflation—which clocked in at 8.5% in April—to return to a target of 2% “with appropriate firming in the stance of monetary policy.”

Key Background

Government stimulus measures and historically low interest rates during the pandemic helped fuel one of the strongest bull markets ever, but stocks have struggled this year as the Fed raises rates and unwinds economic support to ease decades-high inflation. Uncertainty has come to a head in recent weeks, with the tech-heavy Nasdaq posting its worst month since 2008 in April, and the U.S. economy unexpectedly shrinking 1.4% last quarter. “A repricing of stocks is currently taking place due to rising interest rates, which mathematically makes stocks less attractive,” explains David Bahnsen, chief investment officer of $3.6 billion advisory the Bahnsen Group.

Surprising Fact

After rising 27% in 2021, the S&P is down 13% this year. The Nasdaq has plummeted nearly 22%.

Chief Critic

“The violent downside moves we have seen in certain stocks speaks volumes about the bubble-like conditions that the Fed caused with its stimulus,” Danielle DiMartino Booth, CEO and chief strategist of Dallas-based Quill Intelligence, said Wednesday in emailed comments. “The window for the Fed to engineer a soft landing has likely closed, since the economy is already starting to deteriorate before the bulk of the Fed’s inflation-fighting tightening actions have taken place.”

What To Watch For

In a Friday note to clients, Bank of America economist Ethan Harris said the key risk to the economy is that inflation remains elevated next year. “Recession risks are low now, but elevated in 2023 as inflation could force the Fed to hike until it hurts,” he said. Last month’s consumer price index report will be released on May 11, and the Fed’s next policy meeting concludes on June 15.

Fed Authorizes Biggest Interest Rate Hike In 22 Years To Fight Inflation Amid ‘Violent’ Stock Sell-Off