Federal Reserve Raises Interest Rates By 0.5% For First Time In More Than 2 Decades

The Federal Reserve raised its target fed funds rate by 0.5% on Wednesday to a new range of between 0.75% and 1.0%, its first rate hike of at least half a percentage point in more than 20 years. The Fed also said it will begin reducing the size of its balance sheet starting on June 1.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Fed said in a statement.

The Fed also reassured investors that job gains have been strong and the unemployment rate has declined, but noted the war in Ukraine has created significant U.S. economic uncertainty.

The statement comes after the U.S. added 431,000 jobs in March, below the 490,000 jobs economists were expecting. Wage growth was up 5.6% in the month, and the U.S. unemployment rate fell to 3.6%.

All 10 Fed members voted unanimously for the 0.5% hike.

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The Consumer Price Index (CPI) was up 8.5% in March, the highest inflation reading since 1981. The bond market currently projects a 77.2% chance the fed funds rate will rise at least another 2.25% by the end of the year.

Voices From The Street: Quincy Krosby, Chief Equity Strategist for LPL Financial, said the initial market reaction to the rate hike is not surprising.

"The FOMC delivered what it had promised in terms of the rate hike and the balance sheet taper --- and markets are reacting accordingly," Krosby said.

John Lynch, Chief Investment Officer for Comerica Wealth Management, said the Fed has an opportunity for aggressive quantitative tightening in coming months.

"The Fed can send a message about the intensity of their fight against inflation, but also have securities maturing in the $150 billion range these next few months," Lynch said.

Cliff Hodge, Chief Investment Officer for Cornerstone Wealth, said the Fed didn't drop any major bombshells, and the path for quantitative tightening may even be more dovish than some economists expected.

"Overall about as dovish as could be expected while still showing that the Fed is serious about fighting inflation," Hodge said.

Markets React: The SPDR S&P 500 ETF Trust SPY traded higher by 0.7% after the Fed announcement. The yield on 10-year U.S. Treasury bonds increased slightly on Wednesday to 2.97%, up 0.012% on the day.