The Federal Reserve has started its first rate hike in more than three years and the reduction of its balance sheet will begin as early as May

The U.S. Federal Reserve announced on the 16th that it would raise the target range of the federal funds rate by 25 basis points to 0.25% to 0.5%, in line with market expectations. This is the first rate hike by the Federal Reserve since December 2018.

The Federal Reserve issued a statement after a two-day monetary policy meeting, saying that U.S. economic activity and employment indicators continue to strengthen. In recent months, U.S. job growth has been strong and the unemployment rate has fallen sharply. Inflation remains high, reflecting supply and demand imbalances related to the COVID-19 pandemic, rising energy prices, and broader price pressures. The statement pointed out that the impact of the Russia-Ukraine conflict on the U.S. economy is highly uncertain, but in the short term, the situation and events may increase upward pressure on inflation and suppress economic activity.

The statement said that the Fed seeks to achieve full employment and a longer-term inflation rate of 2%. By appropriately tightening the monetary policy stance, the Fed expects inflation to fall back to 2%, while the labor market will remain strong. To support these goals, the Fed decided to raise the target range of the federal funds rate to between 0.25% and 0.5%, and expects that it is appropriate to continue to raise the target range. At a future regular meeting, the Fed will begin to reduce its holdings of U.S. Treasury bonds, agency bonds and agency mortgage-backed securities.

On the same day, the Fed also released a summary of its economic forecasts that has attracted much attention from the financial markets. The summary shows that the Fed lowered its median forecast for GDP growth this year by 1.2 percentage points to 2.8%, and raised its inflation forecast and the median core PCE price index by 1.4 percentage points to 4.1%. In addition, the dot plot of the interest rate hike path in the summary shows that Fed officials predict that the federal funds rate will rise to at least 1.875% by the end of 2022 and to around 2.75% by the end of 2023, suggesting that there will be six more 25 basis point rate hikes this year and three to four more of the same magnitude next year.

Regarding the issue of reducing the balance sheet, Fed interim chairman Powell said at a press conference after the regular monetary policy meeting that Fed officials have made great progress in discussing the reduction of the balance sheet, and will announce the start of the reduction as early as May, which will be faster than the previous cycle. Powell said that the Fed's top priority is to restore the inflation rate to 2%, and reducing the balance sheet is equivalent to raising interest rates in disguise, which is an effective tool for tightening monetary policy.

The Wall Street Journal reported that the Fed's first rate hike in more than three years marked the beginning of a series of subsequent rate hikes, with the goal of preventing the US economy from overheating and controlling inflation, which hit a 40-year high. Many investment strategists said that the Fed's statement and Powell's press conference were more "hawkish" than the market expected. Due to the uncertainty of geopolitical risks, the Fed will flexibly adjust its monetary policy stance based on economic data, and if necessary, it may accelerate the tightening of policies at any time.