The Biggest Interest Rate Hike in 20 Years

Plus, Biden touts falling deficiti n fight against inflation ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ [The Fisc](   By Yuval Rosenberg and Michael Rainey Happy Star Wars Day, and may the fourth be with you! The Federal Reserve showed off its own force today, raising its benchmark interest rate by half a percentage point — the first such hike since 2000 — and signaling that additional aggressive rate increases may lie ahead. The central also launched its “quantitative tightening” program to reduce its $9 trillion balance sheet, drawing billions of dollars out of the economy every month as part of its broader effort to curb high inflation. Here’s what you need to know. [*] Fed Chair Jerome Powell seen on a screen on the floor of the New York Stock Exchange. (Reuters) Fed Raises Interest Rates by 0.50%, Biggest Hike Since 2000 The Federal Reserve raised its benchmark interest rate by half a percentage point Wednesday, in a widely expected move that signals a more pronounced effort to combat inflation in the U.S. economy. The increase, the largest in more than two decades, raises the rate’s target range to between 0.75% and 1%. In addition, the Fed said it will further tighten monetary conditions by shrinking its $9 trillion balance sheet. The central bank will reduce its holdings of Treasuries and mortgage-backed securities by $47.5 billion per month starting in June, with plans to increase that amount to $95 billion three months later. "Inflation is much too high and we understand the hardship it is causing, and we are moving expeditiously to bring it back down,” Fed Chair Jerome Powell said at a press conference following a two-day meeting of the Federal Open Market Committee. A well-telegraphed move: Wealth manager Peter Boockvar of the Bleakley Advisory Group described the Fed’s announcement as “historic yet uneventful” — historic because of the size of the interest rate hike, along with the prospect of similar increases in the coming months, and uneventful because it was so widely anticipated. Still, Powell did deliver some important new information, including a confirmation that the bank was not planning more dramatic moves. Powell said that while the Fed would consider additional half-point rate hikes at “the next couple of meetings,” bank officials are not contemplating larger increases at this time — news that sparked a sizable rally on Wall Street as it eased fears about the central bank moving even more aggressively. (“Note the strong upward move in equity prices of just under 2%,” tweeted economist Joseph Brusuelas of advisory firm RSM, “one might say Powell stuck the landing.”) Supply chain problems: Powell said that Fed officials are “highly attentive to inflation risks,” including ongoing problems with supply chains driven by Covid-19 and the war in Ukraine that are contributing to inflationary pressure. At the same, Powell admitted that the Fed is limited in what it can do about those risks. “Our tools don’t really work on supply shocks,” he said. “Our tools work on demand.” Saying the Fed needs to “stay in its lane” by focusing on cooling demand, Powell pledged to concentrate on the monetary tools it controls as seeks to achieve its dual mandate of price stability and maximum employment. “We’re focused on the job to do in demand and there’s plenty to be done there,” he said. The threat of recession: Powell said he still thinks the Fed can cool the economy without pushing it into recession. “We have a good chance to have a soft or softish landing,” he said, adding that in his view, “the American economy is very strong, and well-positioned to handle tighter monetary policy.” Even so, there are skeptics. Brian Coulton, chief economist at Fitch Ratings, said the Fed’s effort to restore something like normal economic conditions by the end of the year will be a difficult balancing act to pull off. “With inflation pressures ongoing, the risk of monetary tightening prompting a significant growth slowdown or even recession in 2023 is growing,” Coulton said in a note to clients. Biden Touts Falling Deficit in Fight Against Inflation President Joe Biden on Wednesday touted new projections showing that the federal budget deficit is on track to fall by $1.5 trillion this year, the largest year-over-year drop ever, and that the Treasury Department expects to be able to pay down the national debt this quarter for the first time in six years. Ahead of November’s midterm elections, Biden has increasingly emphasized deficit reduction as a key step in fighting inflation that has reached a four-decade high and emerged as a top issue for voters, with 94% of respondents in a recent Washington Post-ABC News poll saying they are concerned or upset about rising prices. “Bringing down the deficit is one way to ease inflationary pressures in an economy where a consequence of a war and gas prices and oil, food and it all — it’s just a different world right this moment because of Ukraine and Russia,” Biden said Wednesday. “We reduce federal borrowing and we help combat inflation.” The budget deficit fell by more than $350 billion in Biden’s first year in office and updated estimates from the Treasury Department project that it will drop by more than $1.5 trillion this year, some $200 billion more than previously projected. That decrease would likely leave the annual budget gap below $1.3 trillion, a level that remains historically high. Drawing an election-year contrast with Republicans: The focus on the deficit and inflation come as Biden seeks to defend and promote his economic policies and score campaign points by contrasting his administration’s fiscal approach with that of former President Donald Trump and a proposal from Republican Sen. Rick Scott of Florida. Biden last month criticized the Trump administration for “fiscal mismanagement” and argued that the current administration is “reducing the Trump deficits and returning our fiscal house to order.” The president and other administration officials argue that Democrats’ $1.9 trillion American Rescue Plan Act passed in 2021 helped fuel a stronger-than-expected recovery from the coronavirus pandemic and, as a result, boosted federal tax revenues and brought down the deficit. “For all the talk that Republicans make about deficits, it didn’t happen a single quarter under my predecessor. Not once,” Biden said of paying down the debt. “The bottom line is the deficit went up every year under my predecessor, before the pandemic and during the pandemic. And it’s gone down both years since I’ve been here, period. They’re the facts.” Biden on Wednesday also hammered a controversial plan released earlier this by Scott, which called for all Americans to pay some federal income tax. Democrats have honed in on the plan as a line of attack on the GOP. “Let me tell you about this Ultra-MAGA Agenda,” Biden said Wednesday. “It’s extreme, as most MAGA things are. It will actually raise taxes on 75 million American families, over 95 percent of whom make less than $100,000 a year. … And under this new plan, this tax plan — the Ultra-MAGA Agenda — while big corporations and billionaires are going to pay nothing more, the working-class folks are going to pay a hell of a lot more.” Wooing Joe Manchin: Biden’s emphasis on the deficit and inflation also dovetails with the priorities laid out by Sen. Joe Manchin (D-WV), a key vote in an evenly divided Senate as Democrats still hope to pass a legislative package of climate programs and tax changes. Biden said Wednesday that he plans to reduce the deficit more and touted elements of his economic agenda that he said would help lower costs for families. Democrats’ ability to enact that agenda, or portions of it, depends to a large extent on Manchin. How will deficit reduction play politically? “It is unclear if greater fiscal responsibility can deliver politically for Biden as Democrats try to defend control of Congress,” Josh Boak and Fatima Hussein of the Associated Press [write](. “One of the challenges for Biden is that voters have largely shrugged off deficit increases and seldom rewarded deficit cuts. Voters might discuss the idea of reducing deficits with pollsters, yet health care, incomes and inflation are often top of mind when casting their ballots.” Norman Ornstein, a senior fellow emeritus at the conservative American Enterprise Institute, told the AP that voters are more likely to be moved by issues that they see as having a direct effect on their lives. Deficits, he said, are “a step removed for most voters, and we’ve been through periods where we’ve had the big deficits and debt and it’s not like it devastated directly people’s lives.” Budget hawks say more needs to be done: Budget watchers applauded the president’s focus on the deficit but questioned how much credit he can claim for reducing the deficit, noting that the drop is largely the result of the expiration of pandemic stimulus spending and higher inflation. “It is wonderful to have a president in the White House who acknowledges the importance of fiscal responsibility; now we need more policy choices to back that up,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. And Douglas Holtz-Eakin, a former director of the Congressional Budget Office who now leads the right-leaning American Action Forum, told the AP: “There needs to be a real fiscal restructuring because we continue to see these trillion-dollar deficits as far as the eye can see.” --------------------------------------------------------------- Send your feedback to yrosenberg@thefiscaltimes.com. And please encourage your friends to [sign up here]( for their own copy of this newsletter. --------------------------------------------------------------- News - [Biden Showcases Deficit Progress in Bid to Counter Critics]( – Associated Press - [Biden Lashes Out at Republicans’ ‘Extreme’ MAGA Agenda, Touts Deficit Reduction]( – Reuters - [Fed Raises Rates Half a Percentage Point, Its Largest Increase Since 2000]( – New York Times - [What the Fed’s ‘Quantitative Tightening’ Plans Mean]( – Bloomberg - [U.S. Forgives $6.8 Billion in Public Service Worker Student Loans]( – Bloomberg - [CDC Reiterates Importance of Masks on Airplanes, Public Transportation]( – Washington Post - [Bipartisan Heat Ramps Up Over Stalled Research Tax Break]( – Roll Call - [GOP Primaries Could Signal Direction of Party’s Earmarks Stance]( – Roll Call Views and Analysis - [The Fed Does Not Deserve All the Inflation Blame]( – Kenneth Rogoff, Project Syndicate - [The Fed Just Raised the Odds of a Recession]( – Kevin T. Dugan, New York - [Dreams of a Soft Landing, Fears of Hard Retirement]( – John Authers, Bloomberg - [War, Pandemic and Measles: A Feared Knock-On Wave Is Looming]( – Washington Post Editorial Board - [Don't Wait! The National Debt Is Only Getting Worse]( – Eric Boehm, Reason - [A Global Tax System Is Good for the U.S.]( – Jason Furman, Wall Street Journal - [ObamaCare Bump Doesn’t Help Those Who Need It]( – Chris Pope, The Hill - [No Abortion Means Poor States Will Get Poorer]( – Allison Schrager, Bloomberg Copyright © 2020 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website or through Facebook. The Fiscal Times, 399 Park Avenue, 14th Floor, New York, NY 10022, United States Want to change how you receive these emails? [Update your preferences]( or [unsubscribe](