The Federal Reserve delivered the biggest hike in interest rates since 2000 on Wednesday and announced that it would start shrinking its massive balance sheet next month. This is seen as the most aggressive tightening of monetary policy in decades to combat soaring inflation. 

The US central bank’s policy-setting Federal Open Market Committee on Wednesday voted unanimously to increase the benchmark Federal Funds Rate by a half percentage point. It will begin allowing its holdings of Treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of $47.5 billion, stepping up over three months to $95 billion. 

“The committee is highly attentive to inflation risks,” the Fed said in the statement, adding a reference to COVID-related lockdowns in China that “are likely to exacerbate supply chain disruptions”. That comes on top of Russia’s invasion of Ukraine and related events, which are “creating additional upward pressure on inflation and are likely to weigh on economic activity”. 

Treasuries fluctuated and stocks remained higher following the decision, while the dollar slipped. Swaps showed traders paring slightly their bets on the amount of Fed tightening they expected for June. 

The increase in the FOMC’s target for the Federal Funds rate to a range of 0.75 to 1 pper cent follows a quarter-point hike in March that ended two years of near-zero rates to help cushion the US economy against the initial blow from COVID-19.