The Federal Reserve took steps to curb rising inflation in the United States on Wednesday, announcing the sharpest rise in interest rates in more than 20 years.
The Fed’s reference interest rate was raised by 0.5 percentage points to a target interest rate between 0.75% and 1%. The increase is the largest since 2000 and follows an increase of 0.25 percentage points in March, the first increase since December 2018.
Interest rates are expected to rise further. The Economist Intelligence Unit expects the Fed to raise interest rates sevenfold in 2022, reaching 2.9% in early 2023. As of June, employees also plan to shrink their $ 9 trillion asset portfolio, a policy move that will further increase borrowing costs.
In a statement, the Fed said that although “overall economic activity fell in the first quarter, household spending and investment in fixed businesses remain strong.” But he warned that inflation “remains high”, the invasion of Ukraine has consequences for the US economy that remain “highly uncertain”, and the blockade of Covid in China “is likely to worsen supply chain disruptions”.
Interest rates were cut to almost zero in March 2020 when the pandemic hit the United States, but they were already low and years of low interest rates left the United States and other countries unprepared for a sudden rise in inflation. Until recently, the Fed dismissed rising prices as “transitional” and expected them to fall as economies recover from the pandemic.
All that has changed now. Arguing for a sharper rise in interest rates last month, Fed Chairman Jerome Powell said: “It is absolutely important to restore price stability. Economies do not work without price stability. ”
Thanks in large part to the unprecedented impact of the coronavirus on the global economy, inflation is now at its 40-year high in the United States. In March, the consumer price index (CPI) was 8.5% higher than a year ago, driven by rising gasoline, shelter and food prices. Rising spending on basic necessities and services is now outpacing average profits.
Prior to the announcement, Jamie Dimon, CEO of JP Morgan Chase, warned that the Fed may have waited too long to raise interest rates. “We’re a little late,” he told Bloomberg. “The sooner they move, the better.”
The impact of the Fed’s policy is already being felt in the wider economy. Since the beginning of the year, mortgage rates have risen at their fastest pace in decades, rising by nearly two percentage points. As a result, some hot real estate markets have begun to cool. The impact of tighter monetary policy has also led to stock market sell-offs.
Powell will give details of the Fed’s decision at a news conference Wednesday afternoon.
More details coming soon…
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