US Federal Reserve enacts biggest rate hike in 22 years

The US Federal Reserve has raised rates by 0.5%, the most aggressive interest rate increase in over 20 years.

In his opening statement, Federal Reserve chair Jerome Powell said: "Inflation is much too high, and we understand the hardship it is causing, we're moving expeditiously to bring it back down."

"It is essential that we bring inflation down if we are to have a sustained period of strong labour market conditions that benefit all."

Powell added the Fed is highly attentive to the risk high inflation poses and was strongly committed to the restoration of price stability.

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Of note, inflation is at its highest level in 40 years, sitting at an eye-watering 8.5% as of March 2022.

However, despite the rate rise decision, markets responded positively to the announcement after Powell quashed speculation of a 75-basis point increase.

He said: "It's not something the committee is actively considering."

After an initially mixed session, following Powell's speech the S&P 500 finished up 124.69 points (2.99%), the index's best day in over a month.

Weighing up the Fed verdict, GSFM investment strategist Stephen Miller said: "While the financial market's initial reaction was perhaps relief that 75-basis point increments appear off the table, there is still some debate over whether the Fed is already in the realm of a policy mistake."

"It is now engaged in the most delicate of central bank high-wire acts."

Miller added that the Fed may have let inflationary expectations escape the realm of being within its ability to comfortably manage without a serious risk of a substantial growth dislocation.

The Federal Reserve may be caught between meeting inflation targets and causing a recession or allowing high inflation to persist into 2023.

"Unfortunately, history is replete with failed central bank attempts at such a high-wire act," he concluded.

Beyond tackling inflationary concerns, the Federal Reserve also announced its plan to drastically reduce the size of its balance sheet.

The committee will soon begin a multi-trillion-dollar balance sheet contraction allowing up to $US95 billion per month to rattle off its portfolio without reinvestment.

Powell said: "We will be prepared to adjust any of the details of our approach in light of economic and financial developments."