The Federal Reserve raised its benchmark interest rate by 75 basis points to 1.75%, its steepest increase in nearly 27 years as the US central bank tries to rein in runaway inflation.
The bank’s rate, known as the federal funds rate, affects the rates that borrowers and savers receive from the bank, most notably on variable-rate mortgages.
The bank had been widely expected to raise rates by half a percentage point, but those expectations have increased in recent days as data shows that the US inflation rate has yet to peak, touching 8.6% for the year to May.
“Inflation remains high, reflecting pandemic-related supply and demand imbalances, higher energy prices and broader price pressures,” the bank said in explaining its decision.
Central banks cut interest rates when they want to stimulate the economy by encouraging people and businesses to borrow and invest. And they raise interest rates when they want to make loans more expensive, to try to cool an economy that is growing too hot.
That’s a fitting description of current worldwide economies, as the cost of living is rising at its fastest rate in decades. Canada’s inflation rate is at a 31-year high of 6.8% and is expected to rise.
The Bank of Canada has raised interest rates three times this year, from 0.25% at the beginning of this year to 1.5% now, in an attempt to cool the situation.
The US central bank hasn’t raised interest rates by 75 basis points since 1994. At the time, the bank was in the midst of seven rate hikes in just over a year, as the Federal Reserve in that time took interest from three times. percent to six percent in an effort to avoid high inflation.
Fed Director Jerome Powell will have more to say about the bank’s line of thought at a media conference later Wednesday.
