Authorities from the Federal Reserve on Wednesday raised the benchmark interest rate by 75-basis points for the first time since 1994 in an attempt to fight inflation in the United States.
However, the move threatens to slow down the country's economic growth and exacerbate financial pressure on Americans in the midst of rising prices for necessities and fuel. The 75-basis point hike underscores just how serious Fed officials are addressing the inflation issue after a string of alarming economic reports.
Interest Rate Hike
The decision also puts the key benchmark federal funds rate at a range between 1.50% to 1.75%, which is the highest since the pandemic began two years ago. Officials of the agency also laid out an aggressive path of rate increase for the remainder of the year.
The situation comes as new economic projections released after the two-day meeting showed policymakers expect interest rates to hit 3.4% by the end of 2022. They would mark the highest level since 2008, as per Fox Business.
By comparison, the March estimate showed that officials were expecting the rate to hit 2.5% by the year's end. In a post-meeting statement, the Fed said that inflation in the country remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
Following the statement, stocks rallied, as the move was approved by all FOMC members except for Kansas City President Esther George who wanted a smaller half-point increase. Economists widely expected the central bank to proceed with a 50-basis point rate hike, which is double the typical size, at its June meeting.
According to the New York Times, as central bankers drive their policy rate rapidly higher, it will make buying a home or expanding a business even more expensive. This would restrain spending and slow down the broader economy.
The Threat of Rising Inflation
Officials expect growth to moderate in the coming months and years and predicted that unemployment will rise about half a percentage point to 4.1% by late 2024 as their policy squeezes companies and workers.
The chair of the Fed, Jerome H. Powell, acknowledged that it was becoming increasingly difficult for the agency to slow inflation without causing a recession as outside forces, including the war in Ukraine and factory shutdowns in China, threaten to curb the supply of goods and commodities.
Powell noted that the agency was not trying to induce a recession right now and explained that the Fed still wanted to reduce inflation to its 2% goal while keeping the labor market strong. However, "those pathways have become much more challenging due to factors that are outside of our control," Powell said.
The Fed chair noted that it was imperative to go bigger than the half-point increase that the agency had previously signaled because inflation was running hotter than anticipated. The move would cause particular hardship to low-income Americans.
Another concern with regards to the decision is that the public is increasingly expecting higher inflation in the future, which can become a self-fulfilling prophecy by accelerating spending among consumers seeking to avoid rising prices for certain goods, the Star Tribune reported.
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