The Federal Reserve raised its key interest rate by 75 basis points to a range of up to 1.75 percent, its most aggressive increase in almost 27 years as the US Federal Reserve struggles to contain powerless inflation.
The bank’s interest rate, known as the federal interest rate, affects the interest that borrowers and savers receive from banks, especially variable-rate mortgages.
The bank was expected to raise interest rates by half a percentage point, but those expectations have risen in recent days as data show that inflation in the United States has not yet peaked, reaching 8.6% in the year to May.
“Inflation remains high, reflecting the imbalance in supply and demand associated with the pandemic, higher energy prices and wider price pressures,” the bank said in a statement.
Inflation in Canada is likely to rise
Central banks cut interest rates when they want to stimulate the economy by encouraging people and businesses to borrow and invest. And they raise interest rates when they want to make loans more expensive to try to cool an overheated economy.
This is an appropriate description of the world’s economies at the moment, as the cost of living is rising at its fastest pace in decades.
Inflation in Canada is at a 31-year high of 6.8% and is expected to rise when the latest figures come out next week.
The Bank of Canada has raised its interest rate three times this year, from 0.25% at the beginning of the year to 1.5% now, in a bid to cool things down.
The US Federal Reserve has not raised its interest rate by 75 basis points since 1994.
At the time, it was in the midst of seven raises in just over a year as the Federal Reserve cut its interest rate from three percent to six percent in a bid to stem high inflation.
Even greater interest rate increases are expected
Borrowing costs have already risen sharply, even before the Fed’s latest move.
The average 30-year fixed interest rate on the mortgage exceeded six percent this week, its highest level since before the 2008 financial crisis. That’s twice as much as in February.
The value of all types of investment, from housing to stocks to bitcoins, has declined in recent months as investors face the reality of high inflation and declining purchasing power.
Even with an almost unprecedented increase of 75 points, markets expect larger interest rate hikes this year, due to how big inflation is.
“Prospects are bleak in terms of curbing inflation in the short term,” said Michael Gregory, deputy chief economist at Bank of Montreal, in an interview with CBC News.
“The Fed has basically raised the ante and we will now reach over three percent by the end of this year.”
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