The Fed Unleashes its Double-Barreled Attack on Inflation

"Inflation is much too high, and we understand the hardship it is causing. We are moving expeditiously to bring it back down." – Jerome Powell, Federal Reserve Chairman

Latest Development

On Wednesday (May 4), after the most recent of its eight regularly scheduled policy meetings, the Federal Open Market Committee announced that they will take aggressive steps to tighten monetary policy.  In what is being hailed a “double-barreled” effort, the Fed will:

  • Raise the benchmark federal-funds half a percentage point, moving the target a range from 0.25% - 0.50% to a range between 0.75% - 1%.
  • Rapidly reduce the $9 trillion portfolio of Treasuries and agency mortgage-backed securities on its balance sheet, that it acquired to support the economy during the pandemic-induced downturn.

 Fed Res


Why Is The Fed Being So Aggressive?

In his comments following the meeting, Chairman Powell indicated that fighting recently soaring inflation has become job number one for Fed (see common measures of inflation spiking in the chart below).  A task made more challenging given ongoing upward pressure on prices stemming from rising wages, and supply chain bottlenecks caused by the war in Ukraine and Covid-19 lockdowns in China.

Fed Res 2

Big Picture

The Fed is taking the type of action not seen in decades to combat the most inflationary environment in the past forty years.  Their goal is to find the sweet spot of taming inflation without slowing the economy so much that it tips into recession.  The tools available to them are blunt in nature, and market participants will be watching closely with the hope that they have the skill to deftly use them, and a modicum of luck to keep them from going too far.

For long-term investors, however, markets have shown resilience over time in inflationary/deflationary and rising/falling rate environments, so it is best not to let the headlines on this issue drive your behavior.


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