The move raises short-term federal funds rates, which means most forms of borrowing will become a lot more expensive.
The US Federal Reserve raised its target interest rate by 3/4 percentage point in an attempt to reduce it Inflation soarsand forecast that the economy will slow down and the unemployment rate will increase in the coming months.
Wednesday’s rate hike announced by the US central bank was the largest since 1994, and came after recent data showed little progress in the fight to control price spikes.
The move raised the short-term federal funds rate to a range of 1.5% to 1.75%. With additional rate hikes, policymakers expect their key rate to hit around 3.25% to 3.5% by year-end – the highest since 2008 – which means most forms of loans will become a lot more expensive.
“Inflation remains high, reflecting pandemic-related supply and demand imbalances, higher energy prices and broader price pressures,” the Federal Open Market Committee set the bank’s policy. The center said in a statement at the end of its most recent two-day meeting in Washington. . “The committee is strongly committed to bringing inflation back to the 2% target.”
This move comes as inflation has picked up voters’ top concerns in the months leading up to the Congressional midterm elections, undermining public opinion on economyundermines President Joe Biden’s approval rating and increases the likelihood of Democrats losing in November.
Biden tried to show that he recognized the pain inflation was causing American households but struggled to find policy actions that could make a real difference. The president has emphasized his belief that the power to curb inflation lies primarily with the Fed.
The move also comes at a time when the central bank is tightening credit tightening and growth is slowing, with inflation hitting a four-decade high of 8.6%, spreading to more regions. of the economy and shows no signs of slowing down.
Meanwhile, Americans are starting to expect high inflation to last longer than in the past. This sentiment could bring inflationary sentiment into the economy making it harder to get inflation back to the Fed’s 2% target.
The Fed’s three-quarter point rate hike beyond the half-point increase Chairman Jerome Powell has previously suggested is likely to be announced this week. The Fed’s decision to adopt such a large rate hike as it did is an admission that it is struggling to contain the pace and persistence of inflation, which has been made worse by Russia’s war against Ukraine and its effects about energy prices.
When asked at a press conference on Wednesday why the Fed was announcing a more aggressive rate hike than he had previously signaled, Powell replied that the latest reports suggest inflation is slowing. hotter than expected.
“We thought strong action was warranted at this meeting,” he said, “and we delivered on that.”
Even if a recession can be avoided, economists say it is almost inevitable that the Fed will incur some pain – most likely in the form of higher unemployment – as the cost pay off of beating chronically high inflation.
Over the next two years, officials forecast the economy will be much weaker than expected in March. They expect the unemployment rate to hit 3.7% by the end of this year and 3.9% by the end of 2023.
Those are only slight increases from the current 3.6% unemployment rate. But they marked the first time since the Fed began raising interest rates that the Fed acknowledged that its actions would weaken the economy.