By Tom Burnett CFA
On May 4, 2022, the Federal Reserve issued its May meeting statement with the announcement of a hike in the funds rate target of 50 basis points. The key rate is now in a range of 0.75-1.0%. In its announcement, the Fed made it clear that inflation is too high and must be brought down, suggesting that further interest rate hikes are a certainty. The ultimate goal is an inflation rate of 2.0% which is far away from the current level of 7-8%. The decision today was unanimously agreed by all the sitting/voting members of the Federal Open Market Committee which sets the rate policies.
In addition, the Fed issued a separate statement about the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet. The Balance Sheet now carries assets of more than $9.0 trillion, up from $4.0 trillion prior to the Covid-19 outbreak in 2020. The reduction process will begin in June with a goal of $45 billion, consisting of $30 billion in Treasuries and $15 billion in mortgage-backed securities. After three months, beginning in September, the total reduction will be increased to $95 billion per month. The Fed statement stressed that the balance sheet reduction will not endanger the economy and that the Fed will monitor bank reserves totals to insure that the market place is not starved for liquidity. As ever, the Fed will adjust these activities as economic issues arise, helping to insure that the labor market remains strong and that inflation is trending downward. In its statement, the Fed remains “highly attentive to inflation risks.”
Interest rates did not move dramatically on the announcement as a 50 basis point move was expected. The Long-Bond Treasury rate held fast at 3.02% (up from 1.91% at the end of 2021) and the Ten-Year Bond rate did not change from the 2.98% level (1.51% at year end.)
The next Fed monetary policy meeting will be held June 15, 2022.
Tom Burnett CFA is Director of Research