US Federal Reserve Announces Biggest Interest Rate Hike Since 1994
US Federal Reserve announces biggest interest rate hike since 1994
The Federal Reserve posted its strongest interest rate hike in nearly 30 years, lifting its benchmark borrowing rate to 0.75 percentage points on Wednesday as it battles against rising inflation.
The Fed’s policy-setting Federal Open Market Committee reaffirmed that it remains “strongly committed to bringing inflation back to its 2% target” and is expected to continue raising key interest rates.
Until recently, the central bank seemed likely to approve a 0.5 percentage point increase, but economists say rapid inflation has put the Fed behind the curve, meaning it needs a strong response. to demonstrate determination to fight inflation
The super-sized move was the first 75 basis point increase since November 1994.
Fed Chairman Jerome Powell will hold a news conference after the meeting to provide more details on the central bank’s plans.
Committee members now see the federal funds rate ending the year at 3.4%, up from 1.9% in March, according to the median quarterly forecast.
They also expect the Fed’s preferred inflation index to pick up to 5.2% by year-end, with GDP growth slowing to 1.7% in 2022 from a 2.8% forecast previously.
The FOMC notes that the impact of Russia’s invasion of Ukraine is “adding increased pressure on inflation and is weighing on global economic activity.”
And the ongoing Covid-19 lockdowns in China “potentially exacerbate supply chain disruptions.”
Kansas City Federal Reserve Bank President Esther George, an inflation fanatic, disagreed with the committee’s vote, preferring a smaller, half-point increase.
Caught off guard
US central banks began raising interest rates to zero in March as rising demand from US consumers for homes, cars and other goods clashed with difficulties in transportation and supply chains in parts of the world where Covid-19 persists – and remains a challenge.
That fueled inflation, which worsened after Russia invaded Ukraine in late February and Western nations imposed hefty sanctions on Moscow, sending food and fuel prices up. with breakneck speed.
Gasoline prices in the US hit a peak of $5.00 a gallon for the first time for the first time and are setting new daily records.
Economists see March as the peak for consumer price increases, but the rate spiked again in May, up 8.6% in the last 12 months, and wholesale prices rose, almost entirely. due to the high cost of energy, especially gasoline.
The Fed has caught off guard with the pace of price increases, and while policymakers generally want to be clear on any policy change for financial markets, the latest data has changed the count.
Powell has indicated that policymakers are poised to make another half-point hike to the benchmark borrowing rate this week and a similar move next month, aimed at staving off red-hot inflation. without pushing the economy into recession and avoiding a 1970s-style stagflation.
However, the central bank cannot influence supply, and raising interest rates will only cool demand and slow the economy – meaning policymakers are on the right track. the line between impacting and doing too much.
And the impact won’t be immediate.
“Monetary policy is slow, inflation today reflects decisions made a year ago,” said Adam Posen, head of the Peterson Institute for International Economics and a former central banker.
“If the Fed were to increase in Q2/Q3 of 2021, inflation would be different now – at least (because) the current global shocks won’t pile up on already high inflation,” he said. Twitter.
(This story has not been edited by NDTV staff and is auto-generated from the syndication feed.)
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