The Federal Open Market Committee raised the target range for its short-term policy rate, the federal funds rate, by half a percentage point at its May 2022 meeting. In its post-meeting statement, the Committee said that inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
The Committee said it is keeping a close watch on other risks to inflation. The implications for the U.S. economy from the situation in Ukraine are highly uncertain and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.
In working toward its goal of 2% inflation on average, along with raising the federal funds rate, the Committee announced its plan to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.
Regarding current conditions, the Fed noted that, 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.
What does this mean for you? Let’s rewind.
May 2022 FOMC Rewind
Quick explainer for the May 2022 FOMC decision (video, 1:29 minutes).
Transcript
Curtis: Hey, Mary! I’ve been hearing a lot about inflation—what’s your take?
Mary: Oh yeah, it’s really on the Fed’s radar.
Curtis: So what are they doing?
Mary: They bumped interest rates up 1/2 percentage point to help fight inflation. And they signaled similar increases in the coming months, so people know what to expect from the Fed.
Curtis: Did they say why?
Mary: Well, families and businesses are spending more and there are a lot of jobs available—which shows the economy is strong. And that means the Fed can reverse the super low interest rates that helped us during the pandemic.
Curtis: So how do higher interest rates fight inflation?
Mary: Well, even though people are spending a lot, things have been in short supply due to the pandemic—and the invasion of Ukraine and lockdowns in China are making it worse. So by raising rates, the Fed can help cool people’s demand a bit to balance with supply.
Curtis: Is there anything else they can do?
Mary: Yes, they announced a plan to trim back their pile of longer-term assets. And that adds to the interest rate increases for loans like home mortgages, which also helps cool the economy.
Curtis: It sounds like a lot of pieces to put in place!
Mary: That’s right—it won’t be easy, but the Fed says they’re committed to getting inflation under control!
Curtis: Cool, thanks for the update!
Mary: Any time!
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The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.