The Federal Reserve raised its benchmark policy rate by half a percentage point for the first time since 2000 and sent a strong signal that it intends to increase it by the same amount at the next two meetings.

At the end of its two-day policy meeting on Wednesday, the Federal Open Market Committee lifted the target range of the federal funds rate to a range of 0.75 per cent to 1 per cent.

It was the first time since 2006 that the central bank has implemented rate increases at back-to-back meetings and comes as the US central bank embraces a more aggressive approach to tackling high inflation.

The Fed raised rates a quarter of a percentage point at its March meeting from the near-zero level where they had hovered since the onset of the pandemic. Since then, top officials have backed a much more rapid withdrawal of the pandemic-era stimulus in light of one of the tightest labour markets in history and signs that price pressures are becoming entrenched.

In a press conference following the announcement, Fed chair Jay Powell said: “There is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings.”

However, he added that a 0.75 percentage point rate rise was “not something that the committee is actively considering”.

Powell said the Fed had “both the tools we need and the resolve that it will take to restore price stability” but warned of further inflationary pressures stemming from supply chain bottlenecks caused by the war in Ukraine and Covid-19 lockdowns in China.

The rate increase marked the Fed’s latest step to “expeditiously” shift monetary policy to a so-called neutral position that neither speeds up nor slows down economic activity.

Officials have suggested a neutral federal funds rate is somewhere between 2 and 3 per cent, but many economists believe it is much higher, given how much inflation has overshot the Fed’s 2 per cent target. Core inflation, as measured by the central bank’s preferred personal consumption expenditures price index, reached 5.2 per cent in March compared with the previous year.

Powell said a neutral rate was “not something we can identify with any precision” and insisted the Fed “will not hesitate” to go beyond that threshold if warranted by the data.

If the Fed delivers half-point rate rises in June and July and then raises rates by a quarter-point at each of the remaining meetings in September, November and December, the fed funds rate would hover between 2.5 and 2.75 per cent by the end of the year.

Fed officials argue the US economy is strong enough to withstand tighter monetary policy without falling into a recession. Powell said there was a “good chance” of a “soft or softish landing”, pointing to the strength of household and corporate balance sheets and the strong labour market.

However, earlier on Wednesday, US Treasury secretary Janet Yellen, who preceded Powell as Fed chair, said the central bank would need to be “skilful and also lucky” to achieve a soft landing.

David Kelly, chief global strategist at JPMorgan, said: “This is a Fed that has cooed like doves for a decade and now they’re trying to squawk like hawks, very loudly. But I still think this is a dovish Fed, and I believe they will have a chance to return to their dovish nature later in the year.”

Markets reacted positively to Powell’s comments that appeared to rule out a 0.75 percentage point rate increase, with the S&P 500 and Nasdaq Composite indices rising to their highest levels in a week.

The two-year Treasury yield, which moves with interest rate expectations, fell 0.12 percentage points to 2.66 per cent. Investors in the futures market are now betting that the Fed’s key interest rate will be 2.79 per cent at the end of the year, down from 2.88 per cent on Tuesday.

The Fed reiterated its optimistic outlook in its policy statement, saying it expected the labour market to remain “strong” with “appropriate firming in the stance of monetary policy” that would bring inflation back to the target range.

The Fed also detailed its plans to pare back its $9tn balance sheet by shrinking its portfolio of Treasuries and agency mortgage-backed securities, which has ballooned since early 2020 as it hoovered up bonds to support the economy.

The central bank will begin reducing its holdings in June using a process known as run-off whereby it stops reinvesting the proceeds of maturing securities.

The Fed will initially cap the run-off at $30bn a month for Treasuries and $17.5bn for agency MBS and will increase the threshold over three months to as much as $60bn and $35bn, respectively.

When the amount of maturing Treasuries falls below the $60bn cap, the Fed will make up the difference by reducing its holdings of shorter-dated Treasury bills. Investors reckon the Fed will also have to resort to outright sales of agency MBS at some point, given the date that some of its securities are expected to mature.

The central bank is moving much more quickly than it did when it last attempted to shrink its balance sheet. That process kicked off roughly two years after the Fed first raised rates in 2015 following he global financial crisis. Back then, it set a $10bn monthly cap, which was gradually lifted to $50bn.

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