The Federal Reserve on Wednesday intensified its drive to tame high inflation by raising its key interest rate by three-quarters of a point—its largest hike in nearly three decades—and signaling that more large rate increases are to come.
The Fed will raise its benchmark short-term rate, which affects many consumer and business loans, to a range of 1.5% to 1.75%. Through additional rate hikes, the Fed expects its key rate to reach a range of 3.25% to 3.5% by year’s end—the highest level since 2008—meaning that most forms of borrowing will become sharply more expensive.
The central bank is ramping up its drive to tighten credit and slow growth as inflation has reached a four-decade high of 8.6%, spreading to more areas of the economy and showing no sign of slowing. Americans are also starting to expect high inflation to last longer than they had before. This sentiment could embed an inflationary psychology in the economy that would make it harder to bring inflation back to the Fed’s 2% target.
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 hike as large as it did Wednesday was an acknowledgment that it’s 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 today why the Fed was announcing a more aggressive rate hike than he had earlier signaled it would, Powell replied that the latest reports had shown inflation to be hotter than expected. Read more.
