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Rate hike by 50 basis points: US central bank wants to fight inflation more vigorously

 


The US Federal Open Market Committee (FOMC) announced after a two-day meeting on Wednesday that interest rates would be raised by 50 basis points, or 0.5 percent. Such a decision was already expected in advance. This is the second of an expected seven interest rate adjustments this year. In March, the US Federal Reserve raised interest rates by 25 basis points, or 0.25 percent, the first hike since 2018.


Markets were already braced for Wednesday's rate hike, which was the largest since 2000. It was therefore expected that the immediate reaction to this decision would be non-existent. US Federal Reserve Chair Jerome Powell indicated in April that there would be a 0.5 percent adjustment. Immediately following the central bank's announcement, risky assets such as stocks and even cryptocurrencies have surged.

Bitcoin ( BTC ) has fallen over 40 percent since the US Federal Reserve announced interest rate hikes in November . Following the March decision, BTC was hovering around $41,000. It's currently under $40,000.


With this interest rate hike, the FOMC wants to combat rising inflation, which reached 8.5 percent in March, the highest level in four decades . Many economists have criticized the US Federal Reserve for being too slow in tackling inflation and therefore prone to overreacting. The Fed left interest rates at zero to support the economy in the wake of the corona pandemic. In 2021, she has wrongly labeled the inflation spike as "temporary". With the war in Ukraine and renewed lockdowns in China, global inflationary pressures have now increased even further.


The Fed also announced on Wednesday that it intends to reduce its balance sheet and sell bonds and securities in the process. The balance sheet has doubled to $9 trillion since the pandemic began. At best, this will result in a temporary shock to financial markets. However, this step could also have negative effects in the longer term.


After the committee vote, Powell gave a press conference where he assured Americans that the Federal Reserve was "working swiftly" to bring inflation under control. He said the central bank believes incremental hikes of 50 basis points are appropriate to bring inflation within the current 2 percent target range. He also said the committee would not consider hikes of 75 basis points. Future rate adjustments would be closer to 25 basis points.


US President Joe Biden said the Treasury Department will reduce the national debt this quarter. This will also help fight inflation. US Treasury Secretary Janet Yellen told a Wall Street Journal event on Wednesday that she expects continued economic growth this year and a "soft landing" on inflation without a recession.

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