Fed Hikes Interest Rate, but Still Placates Wall Street

(KNSI) – The stock market roared Wednesday, kicking into high gear during a press conference hosted by Federal Reserve Chairman Jerome Powell. He introduced two measures designed to drain liquidity from the financial system and slow down inflation.

The first was a half percent interest rate hike, moving the target rate to 1%. Powell says rate hikes should continue. He advised, “We are on a path to move our policy rate expeditiously to more normal levels, assuming that economic and financial conditions evolve in line with expectations. There is a broad sense on the [Open Market] Committee that additional 50 basis point increases should be on the table at the next couple of meetings.”

The second policy change is a reduction of the Federal Reserve’s balance sheet. It has sat at around $9 trillion since the early days of the pandemic. The Fed purchased Treasury bonds and mortgage-backed securities, exchanging the assets for cash. At the time it kept the banking system from seizing up given the economic turmoil brought on by the response to COVID-19. Now the assets will be sold back into the market and cash will come out.

Powell says the committee, “also decided to begin the process of reducing the size of our balance sheet, which will play an important role in firming the stance of monetary policy.” The Fed will begin selling off $47.5 billion in assets in June, continuing through August. Starting in September, the cap rises to as much as $95 billion per month.

Powell placated stock market participants leading to the Dow Jones Industrial Average jumping over 930 points on the day, almost entirely within the last 90 minutes of the session. He said the Fed could affect demand, especially in the labor market, but punted on having any responsibility for inflation caused by supply shocks or war. He said the Fed would look carefully at financial conditions before committing to future rate hikes.

He took a surprise move off the table. Powell told CNBC’s Steve Liesman, “75 basis points (3/4%)…in an increase is not something that the committee is actively considering.”

Many market participants had feared the Fed would chart a course similar to that of 1994. It consisted of multiple 50 basis point hikes and a surprise 75 basis point move that occurred in between Open Market Committee gatherings in November of that year.

The fed funds futures rate had priced in a 75 basis point move for June of this year. Saint Cloud State University Economist and Dean of the School of Public Affairs, King Banaian, told KNSI last month he thought a hike of that magnitude was possible.

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