Washington: The Federal Reserve announced the most aggressive interest rate increase in nearly 30 years, raising the benchmark borrowing rate by 0.75 percentage points on Wednesday as it battles against surging inflation.
The Fed’s policy-setting Federal Open Market Committee reaffirmed that it remains “strongly committed to returning inflation to its 2 percent objective” and expects to continue to raise the key rate.
Until recently, the central bank seemed set to approve a 0.5-percentage-point increase, but economists say the rapid surge in inflation put the Fed behind the curve, meaning it needed to react strongly to prove its resolve to combat inflation.
The move raised the short-term federal funds rate to a range of 1.5 percent to 1.75 percent. With additional rate hikes, policymakers expect their key rate to reach a range of 3.25 percent to 3.5 percent by year’s end — the highest level since 2008 — meaning most forms of borrowing will become sharply more expensive.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures,” the central bank’s policy-setting Federal Open Market Committee said in a statement at the end of its latest two-day meeting in Washington. “The committee is strongly committed to returning inflation to its 2 percent objective.”
The move comes as inflation has shot to the top of voter concerns in the months before Congress’ midterm elections, souring the public’s view of the economy, weakening President Joe Biden’s approval ratings and raising the likelihood of Democratic losses in November.
The super-sized move was the first 75-basis-point increase since November 1994.
Committee members now see the federal funds rate ending the year at 3.4 percent, up from the 1.9 percent projection in March, according to the median quarterly forecast.
They also expect the Fed’s preferred inflation index to rise to 5.2 percent by the end of the year, with GDP growth slowing to 1.7 percent in 2022 from the previous 2.8 percent forecast.
The FOMC noted that effects of Russia’s invasion of Ukraine are “creating additional upward pressure on inflation and are weighing on global economic activity.”
And ongoing Covid-19 lockdowns in China “are likely to exacerbate supply chain disruptions.”
Kansas City Federal Reserve Bank President Esther George, a noted inflation-hawk, dissented from the committee vote, preferring a smaller, half-point increase.
The Fed’s three-quarter-point rate increase exceeds the half-point hike that Chair Jerome Powell had previously suggested was likely to be announced this week. The Fed’s decision to impose a rate increase as large as it did was an acknowledgement that it is struggling to curb the pace and persistence of inflation, which has been worsened by Russia’s war against Ukraine and its effects on energy prices.
Asked at a news conference on Wednesday why the Fed was announcing a more aggressive rate increase than he earlier signalled, Powell replied the latest reports had shown inflation to be hotter than expected.
During the next two years, officials are forecasting a much weaker economy than was envisioned in March. They expect the unemployment rate to reach 3.7 percent by year’s end and 3.9 percent by the end of 2023.
Those are only slight increases from the current 3.6 percent jobless rate. But they mark the first time since it began raising rates that the Fed has acknowledged its actions will weaken the economy.
Comments are closed.