The Federal Reserve moved to tamp down soaring inflation in the US on Wednesday, announcing the sharpest rise in interest rates in over 20 years.
The Fed’s benchmark interest rate was raised by 0.5 percentage points to a target rate range of between 0.75% and 1%. The hike is the largest since 2000 and follows a 0.25 percentage point increase in March, the first increase since December 2018.
More rate rises are expected. The Economist Intelligence Unit expects the Fed to raise rates seven times in 2022, reaching 2.9% in early 2023. Starting in June, officials also plan to shrink their $9tn asset portfolio, a policy move that will further push up borrowing costs.
In a statement the Fed said that although “overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong”. But it warned that inflation “remains elevated,” the invasion of Ukraine had implications for the US economy that remain “highly uncertain” and Covid-related lockdowns in China “are likely to exacerbate supply chain disruptions”.
Rates were cut to near zero in March 2020 when the pandemic hit the US but they were already low and years of low rates left the US and other countries ill-prepared for a sudden rise in inflation. Until recently the Fed had dismissed rising prices as “transitory” and expected them to fall as economies recovered from the pandemic.
All that has now changed. Making the case for sharper rate raises last month, the Fed chair, Jerome Powell, said: “It’s absolutely essential to restore price stability. Economies don’t work without price stability.”
Thanks in large part to the unprecedented impact of the coronavirus on the global economy, inflation is now running at a 40-year high in
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