The US central bank (Federal Reserve) raised interest rates by 0.75 percentage points on Wednesday (15), the biggest increase since 1994, according to an official statement.

This is the third straight increase and the biggest increase in over 27 years, with base rates ranging from 1.5% to 1.75%. The bank says it is “strongly committed to bringing inflation to its target level of 2%” per annum.

The Fed fights inflation and maintains its credibility – Photo: Wikimedia Commons/Disclosure/ND

The Fed said in a statement that it expects further increases in benchmark interest rates. Most members of the Monetary Policy Committee (FOMC) predict that this range will reach 3.25%-3.50% by the end of the year.

The organization’s president, Jerome Powell, estimated at a July meeting that a further increase to 0.75 percentage points was “very likely.”

“Certainly, today’s (Wednesday) 75 basis point increase is infrequent and important (…). From that perspective, a 50 or 75 basis point increase looks very likely at our next meeting,” he said at a press conference after the two-day FOMC meeting as Wall Street gained momentum following the announcements.

new predictions

The Fed also raised its inflation forecast for 2022 to 5.2% and lowered its growth forecast to 1.7%.

Inflation remains “high and reflects the imbalance in supply and demand associated with the pandemic, higher energy prices and, more broadly, price pressures,” the central bank said.

The Fed noted that the invasion of Ukraine and subsequent sanctions against Russia created “additional upward pressure on inflation and impacted global economic activity.”

In addition, the lockdown in China is exacerbating the supply chain problems that are holding back US economic growth.

For the Fed, the unemployment rate will be 3.7% at the end of 2022 in the US, compared to 3.5% expected at its previous meeting, and was at the February 2020 level, the lowest in the country’s history, before the start of the pandemic. coronavirus pandemic.

The prospect of an interest rate hike has been roiling markets since last week after May inflation data was released on Friday.

Consumer price data recorded a 40-year high on a 12-month basis, up 8.6%.

Trust is at stake

Rising base interest rates increase the cost of loans that commercial banks provide to their customers.

The Fed is fighting inflation even harder because its credibility is at stake. Its leaders have been saying for months that this price increase will be temporary, and therefore began to tighten the screws only in March.

“Economic activity has broadly rebounded” after contracting in the first quarter, the Fed said on Wednesday, citing “strong job growth in recent months and low unemployment.”

“Looking back… it probably would have been better to raise rates earlier,” Powell admitted last month in an interview with The Wall Street Journal.

Joe Biden Treasury Secretary Janet Yellen also admitted that she did not expect such a price increase.

The Fed is independent of the federal government, but Powell was recently hosted by Biden at the White House with Yellen for a rare meeting on inflation.

The Fed, on the other hand, needs to be careful deliberately slowing down the economy so as not to drag it into recession.

The Fed’s Money Committee is meeting for the first time since Powell officially began his second term on May 23, and Lael Brainard became the institution’s vice chairman. This meeting also marks the arrival of two new governors, Lisa Cook and Philip Jefferson, to the body.