The Fed is attacking inflation with its biggest interest rate increase since 1994

WASHINGTON – The Federal Reserve stepped up its fight against high inflation on Wednesday, raising its key interest rate by three-quarters of a point – the biggest increase since 1994 – and signaling further interest rate hikes ahead as it tries to cool the US economy without causing a recession.

The unusually large rise in interest rates came after data released on Friday showed that US inflation rose to a four-decade high of 8.6% last month, a surprise jump that has caused financial markets to worry about how the Fed will react. The Fed’s reference short-term interest rate, which affects many consumer and business loans, will now be set at 1.5% to 1.75% – and Fed politicians predict a doubling of that range by the end of the year.

“We thought decisive action was needed at this meeting, and we did it,” Fed Chairman Jay Powell told a news conference, stressing the central bank’s commitment to doing what it takes to bring inflation back to the Fed’s target. 2%, even if this leads to a slightly higher unemployment rate.

Powell said it was imperative to reach more than the half-point increase the Fed had previously signaled, as inflation was hotter than expected – causing particular difficulty for low-income Americans – and that public expectations of rising inflation have become stronger.

Powell said another three-quarter increase was possible at the next Fed meeting in late July if inflationary pressures remain high, although he said such increases would not be common. He said the economy is strong enough to withstand higher rates without falling into recession, a prospect many economists are increasingly worried about.

Some financial analysts have suggested that Powell struck the right balance to reassure markets that rose on Wednesday. “He hit hard that ‘we want to cut inflation’, but he also hit hard that ‘we want a soft landing,'” said Robert Tip, chief investment strategist at PGIM Fixed Income.

However, the Fed’s action on Wednesday was a recognition that it is struggling to curb the pace and persistence of inflation fueled by a strong labor market linked to pandemic disruptions in supply and rising energy prices, exacerbated by Russia’s invasion of Ukraine. .

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