Federal Reserve hikes rates by 0.75%, biggest increase since 1994
The Federal Reserve approved the biggest interest rate increase since 1994 and expected more hikes this year at the fastest pace in decades as it races to combat inflation that is running at a 40-year high.
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The exterior of the Marriner S. Eccles Federal Reserve Board Building in Washington, D.C., U.S. (Reuters, Sarah Silbiger)
On Wednesday, the Federal Reserve increased its target interest rate on Wednesday by three-quarters of a percentage point and estimated a slowing economy and more unemployment in the coming months.
"The Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate," the central bank’s Federal Open Market Committee (FOMC) said in a statement on its monthly rate decision for June.
The rate hike was the biggest since 1994, and US central bank officials warned of a faster rate hike in the future.
"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures," the statement added, noting that the committee "is strongly committed to returning inflation to its 2% objective."
A 75-basis-point increase for the 3rd time
The Fed announced a 75-basis-point or three-quarter percentage point increase in interest rates, the third since the outbreak of the coronavirus pandemic two years ago.
"Seventy-five basis points seemed like the right thing to do at this meeting, and that's what we did," Fed Chair Jerome Powell said at a press conference after the decision was taken.
Moreover, Powell said a hike of either three-quarters of a point or a half point would "most likely" be the proper outcome of the next meeting of the central bank in July.
"The Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate," the FOMC said in the statement.
Inflation remains at 40-year-high
A downgrade to the Fed's economic outlook accompanied the tightening of monetary policy, and the economy this year is seen to be slowing to a below-trend 1.7% rate of growth, while unemployment is expected to be rising to 3.7% by the end of the year, and would continue to rise to 4.1% through 2024.
Senior investment strategist at Allspring Global Investments, Brian Jacobsen, stated that the Fed "is willing to let the unemployment rate rise and risk a recession as collateral damage to get inflation back down."
When Fed officials estimated in March they could increase the rates and control inflation with the unemployment rate remaining around 3.5%, inflation has remained at a 40-year high.
Inflation has become the Fed's most critical economic issue and has begun to shape the political scene too amid soaring prices of food and gasoline.
