The US Federal Reserve (Fed) announced the steepest increase in interest rates in over 20 years by raising its benchmark interest rate by 0.5 percentage points, in an effort to cool the country’s skyrocketing inflation.
The Federal Reserve lifted its benchmark interest rate by 0.5 percentage points to a target rate range of 0.75% to 1%.
The rise is the greatest since 2000, and it comes after a 0.25% rise in March, the first since December 2018, and more rate hikes are likely.
The Federal Reserve is expected to hike rates seven times in 2022, hitting 2.9% in early 2023, according to the Economist Intelligence Unit.
Officials also expect to reduce their $9tr asset portfolio beginning in June, a strategic decision that will raise borrowing costs even more.
The Fed had addressed the rising inflation in terms of implications that the invasion of Ukraine has on the US economy and further supply chain disruptions due to Covid-related lockdowns in China are not helping.
When the pandemic hit the US in March 2020, rates were cut to near zero, but they were already low, and years of low rates had left the United States and other countries unprepared for a sudden rise in inflation.
The Fed had rejected growing prices as “transitory” until recently, expecting them to fall as economies recovered from the pandemic.
Inflation in the US is at a 40-year high, thanks to the coronavirus’s extraordinary impact on the global economy.
The Consumer Price Index was 8.5% higher in March compared to 2021, owing to higher gas, housing, and food prices.
The rising costs of basic goods and services are now outpacing typical pay increases and the Fed’s approach is already having an influence on the economy as a whole.
Mortgage rates have risen over 2% since the beginning of the year which is the quickest in decades. As a result, several hot real estate markets have begun to cool down.
Stock market selloffs have been triggered by the impact of tighter monetary policy as well said the Guardian.
Jerome Powell, Fed chair, said, “Inflation is much too high, and we understand the hardship it is causing. We are moving expeditiously to bring it back down.”
“Some of us are old enough to have lived through high inflation and many aren’t. But it’s very unpleasant. If you are a normal economic person, then you probably don’t have that much extra to spend, and it’s immediately hitting your spending on groceries, on gasoline, on energy, things like that. We understand the pain involved.”
Powell stated that the economy remained robust and that he was optimistic that the Fed could act without causing a recession, but he also stated that the Fed will engage aggressively to combat inflation.