(CNN) — The Federal Reserve on Wednesday raised interest rates by three-quarters of a percentage point in an aggressive move to address the inflation red hot that is plaguing the economy, frustrating consumers and stifling the Biden administration.
It is the largest rate increase since 1994 and will affect millions of American businesses and households, raising the cost of home, auto, and other loans to force a slowdown in the economy.
Until this week, economists and investors expected the Fed to raise its benchmark interest rate by half a point, the second such move in the last 22 years. However, after a disastrous inflation report on Friday revealed that price rises are widening across the economy, expectations of a more drastic rate hike rose.
Americans are struggling with rising costs from the grocery store to the pump for gasoline and the Fed is tasked with keeping prices steady.
Rising prices from food to gasoline, which hit a series of daily record highs in the past month, have led to the lowest consumer confidence since 1952.
When the pandemic first hit the United States, the Federal Reserve implemented a series of emergency measures to support the economy, including cutting its interest rate to zero, which made borrowing money almost free. But while that “easy money” policy encouraged household and business spending, it also fueled inflation and contributed to the overheating of today’s economy.
Now that the economy no longer needs the Fed’s support, the central bank has been taking steps to “eliminate the punch bowl” and slow the economy by aggressively raising interest rates.
The Fed’s actions will raise the rate banks charge each other for overnight loans to between 1.5% and 1.75%, the highest since before the pandemic hit the United States.
The rate increase is not entirely unexpected: Some major banks, including Barclays, Jefferies, Goldman Sachs and JPMorgan, had expected the Fed to raise its rate by 75 basis points, or three-quarters of a percentage point.
The central bank’s announcement came at the end of its two-day policymaking meeting.
Fed Chairman Jerome Powell acknowledged that the decision to raise interest rates by three-quarters of a percentage point was much larger than the Fed’s usual rate hikes. He suggested the Fed would not get used to being so aggressive… but it did not rule out another increase of this magnitude at its next meeting in July.
“Clearly today’s 75 basis point rally is unusually large, and I don’t expect moves of this size to be common,” Powell said.
However, he added that the Fed would likely be debating whether to raise rates by 75 basis points or just 50 basis points when it meets late next month.
“We will make our decisions on a meeting-by-meeting basis,” Powell said, stressing once again that the Fed will remain “data dependent.”
Powell tried to reassure investors and all Americans that the central bank understands its huge responsibility to control prices.
The Fed “has the tools that we need and the resolve that it will take” to bring soaring inflation back to normal, Powell said at the start of his remarks on Wednesday.
“In the current highly unusual circumstances with inflation well above our target, we think it’s helpful to provide even more clarity than usual,” Powell said.
Powell noted that after the Consumer Price Index showed inflation returning to a 40-year high in May, the Fed was prepared to act quickly.
“The question is, ‘what do you do? And do you wait six weeks to do it at the next meeting?’ Powell said. “And I think the answer is that’s not where we’re at with this. So we decided we had to move on.”
This article was made with information from David Goldman, Paul R. La Monica and Nicole Goodkind