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US Fed takes a big step to control inflation

Posted May. 06, 2022 07:51,   

Updated May. 06, 2022 07:51


The U.S. Federal Reserve (Fed) took a big step to raise the base rate by 0.5 percentage points on Wednesday (local time) to lower soaring inflation. Such a level of increase was introduced for the first time in 22 years since May 2000 when there was the dot-com bubble. The Fed will also begin quantitative tightening by selling its bonds last month to reduce liquidity in the market.

“Inflation is much too high and we understand the hardship it is causing,” Fed Chair Jerome Powell said after a regular meeting of the Federal Open Market Committee (FOMC). “We are moving expeditiously to bring it back down.”

He added that additional 50 basis point hikes would be reviewed at the next two meetings. There are five FOMC meetings left in June, July, September, November, and December this year. Wall Street also believes that the Fed will consecutively raise the interest rate by 0.5 percentage points in June and July. An aggressive tightening policy is inevitable as the U.S. inflation reached 8.5 percent in March, which is the highest level since 1981, while there is significant pressure for inflation due to oil producer Russia’s invasion of Ukraine, rising global oil prices, and a lockdown in Shanghai.

However, Powell drew a line by saying that a giant step to raise the base rate by 0.75 percentage points at once is not being considered. He also said that an economic downturn seems unlikely regarding concerns about the Fed’s aggressive tightening to cause an economic slump in the U.S. Against this backdrop, Wall Street, which was concerned about 0.75 percentage point raise, was relieved. The Dow Jones Industrial Average and the Nasdaq rose 2.81 percent and 3.19 percent on Wednesday, respectively, compared to the previous day.

Jae-Dong Yu jarrett@donga.com