As expected by the markets, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 50 basis points (bp) at its meeting on May 3-4, 2022. The new target range is 75-100 bp.
The FOMC's press release stated: "Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures."
- The Federal Open Market Committee (FOMC) voted to increase the fed funds rate by 50 basis points at its meeting on May 3-4, 2022.
- It cited "robust" job gains, an unemployment rate that has "declined substantially," and "elevated" inflation as its reasons.
- The FOMC sees Russia's war on Ukraine and COVID-related lockdowns in China as key risks that could dampen economic activity and increase inflation.
- The FOMC will begin reducing its balance sheet in June, initially by $47.5 billion per month, then by $95 billion per month after three months.
All nine voting members present at the meeting voted in favor of the 50 bp rate increase, including Fed Chair Jerome Powell and Vice Chair Nominee Lael Brainard. All nine also voted for the plan to reduce the Fed's balance sheet, as detailed below.
Critical Economic Uncertainties
The FOMC statement indicated that implications for the U.S. economy of Russia's invasion of Ukraine are "highly uncertain." It noted that the invasion and related events are adding to inflationary pressures and are likely to have a negative impact on economic activity. Additionally, the FOMC warns that COVID-related lockdowns in China are likely to worsen supply chain disruptions.
Reducing the Fed's Balance Sheet
In a separate statement, the FOMC detailed its plan for reducing the Fed's balance sheet. Beginning on June 1, 2022, the System Open Market Account (SOMA) will reduce its holdings of U.S. Treasury securities by $30 billion per month, rising to $60 billion after three months. The SOMA will reduce its holdings of U.S. agency debt and U.S. agency mortgage-backed securities (MBS) initially by $17.5 billion per month, rising to $35 billion per month after three months. The total monthly reduction thus will start at $47.5 billion and rise to $95 billion after three months.
The figures cited above are called "caps" by the FOMC. They represent the amounts of principal payments received in a given month that will not be reinvested by the managers of the SOMA. Any principal payments received in excess of those "caps" will be reinvested, however.