Fed hikes rates by half point, starts balance sheet reduction June 1 By Reuters

© Reuters. FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 27, 2019. REUTERS/Brendan McDermid/File Photo

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) -The Federal Reserve on Wednesday raised its benchmark overnight interest rate by half a percentage point, the biggest jump in 22 years, and said it would begin trimming its bond holdings next month as a further step in the battle to lower inflation.

The U.S. central bank set its target federal funds rate to a range between 0.75% and 1% in a unanimous decision, with further rises in borrowing costs of perhaps similar magnitude likely to follow.

Despite a drop in gross domestic product over the first three months of this year, “household spending and business fixed investment remain strong. Job gains have been robust,” the rate-setting Federal Open Market Committee said in a statement following the end of a two-day policy meeting in Washington.

Inflation “remains elevated” with the war in Ukraine and new coronavirus lockdowns in China threatening to keep pressure high, it said. “The Committee is highly attentive to inflation risks.”

The statement said the Fed’s balance sheet, which soared to about $9 trillion as the central bank tried to shelter the economy from the COVID-19 pandemic, would be allowed to decline by $47.5 billion per month in June, July and August and the reduction would increase to as much as $95 billion per month in September.

Policymakers did not issue fresh economic projections after this week’s meeting, but data since their last gathering in March have given little sense that inflation, wage growth, or a torrid pace of hiring had begun to slow.

U.S. stock markets moved higher after the announcement, while yields on government bonds were little changed. The dollar weakened modestly against a basket of major trading partners’ currencies.

Interest rate futures continued to reflect bets the Fed will raise its policy rate to the 3%-to-3.25% range by the end of the year, according to CME Group’s (NASDAQ:) FedWatch tool, a pace that would include several half-percentage-point, or bigger, rate hikes to achieve.

The Fed “also signaled an aggressive path of further rate hikes, reiterating the recently stated desire to raise rates to their neutral level as soon as possible,” said Michael Brown, head of market intelligence for Caxton in London. “However, given the significant amount of hikes already priced into the market … the bar for a hawkish surprise was always a high one.”

Fed Chair Jerome Powell is scheduled to hold a news conference at 2:30 p.m. EDT (1830 GMT) to elaborate on the policy statement and economic outlook.