The US Federal Reserve raised interest rates by 0.5% for the first time since 2000, while sending a strong signal that hikes of the same size would come in future meetings.

Yesterday evening, the Federal Open Market Committee implemented its first back-to-back hike since 2006 as it expressed a more aggressive approach to tackling inflation, which hit 8.5% in the US in March, the highest level since 1981.

Powell (pictured) also outlined plans to reduce the Fed's balance sheet, beginning with a runoff of $30bn and $17.5bn in Treasuries and mortgage-backed securities respectively in June, then rising to a combined monthly reduction of $95bn by September.

Richard Flynn, UK managing director at Charles Schwab, said he expected investors were "unsurprised" by the rate hike. 

"Markets had been bracing for the Fed to raise interest rates by a half-point, a much sharper move than the quarter-point hike two months ago," he explained. "Since March, the Fed's plans have evolved in the face of historically high levels of inflation.

"Financial conditions have begun to tighten as the Fed raises short-term interest rates and emphases its commitment to reining in price rises."

Ronald Temple, co-head of multi-asset and head of US equity at Lazard Asset Management, agreed, stating that "we didn't get shock and awe, but we did get meaningful tightening and a clear signal that more 50bps hikes are ahead".

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Chief strategist at Principal Global Investors Seema Shah was critical of the Fed, though she said that the move was its "first meaningful move towards righting their inflation wrong, and this should be welcomed by investors rather than feared".

"Even so, this first 0.5% move since 2000 is not nearly enough," she warned. "In the seven weeks since Fed lift-off, the inflation risk seems to have only grown. Headline inflation is near 9%, inflation expectations remain elevated, there are almost two vacancies to each unemployed person, and measures of wage growth continue to rise."

Shah added that while inflation could peak in coming months, "the broadening and intensification of price pressures imply that inflation will decline very gradually". She predicted that inflation would still likely sit at about 5% by the end of 2022.

"The Fed will need to look beyond simmering growth risks, and instead remain sharply focused on its inflation fight," she concluded. "The first back-to-back hikes of over 0.25% since 1984 are beckoning."

Silvia Dall'Angelo, senior economist at Federated Hermes Limited, noted that Fed chair Jerome Powell had "conveyed a sense of urgency with respect to addressing high inflation, stressing inflation is running "much too high" and reiterating the Federal Open Market Committee is "highly attentive to inflation risks", a sentence that also appeared in today's statement."

"While Powell reiterated his belief there is a decent chance of achieving a soft (or softish) landing, they rarely happen," she pointed out. "It will be difficult for the Fed to calibrate the right amount of tightening, given it is starting from behind the curve.

"There is uncertainty about structural trends in the economy after the pandemic and monetary policy works with variable lags."

Recession

Recession is on the minds of many analysts, as fears grow that an economic slowdown is approaching after US GDP shrank in the first quarter of the year.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: "The market has been well prepared for these moves but that doesn't mean they will necessarily take them well. We will continue to see increased market volatility for as long as inflation remains a problem for central banks.

"The question for investors is whether the increase in rates will slow the US economy and make a recession more likely especially with mortgage rates having jumped by almost 2% so far this year."

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Flynn agreed, adding: "Alongside tightening monetary policy, a number of risks - persistently high inflation, indications that consumer demand is softening, and the economic consequences of the Russian invasion of Ukraine - have raised investors' concerns about the strength of future economic growth.

"In this context, market volatility is likely to continue."

However, Gurpreet Gill, macro strategist, global fixed income at Goldman Sachs Asset Management, said that "growth looks resilient, despite GDP in the first quarter falling short of expectations". He argued that he expects "the Fed's policy decisions to turn more data dependent" as it stays on the path of aggressive tightening.

Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, noted that critically, Powell "ruled out scope for 75 basis point hikes for now," even with strong indications of 0.5% hikes in the coming months.

He added: "We continue to think that, ultimately, the Fed will hike less than market expectations, but for now the hawkish stance is likely to remain intact given the strong state of the labour market and inflationary dynamics.

"The Fed committed a policy mistake last year by letting inflation run out of control, and as a result, it could be walking a narrow road for some time as it looks to balance the tightening path without creating an accidental recession.

"When it comes to asset allocation, we remain cautious given the overall hostile Fed stance."