- Natalie Sherman
- Economics editor, BBC
3 hours ago
The Federal Reserve raised interest rates by half a percentage point, to a range of 0.75 percent and 1 percent
The US central bank on Wednesday announced the largest rate increase in more than two decades, 22 years, as part of its current battle to rein in rapid rate hikes.
The Federal Reserve said it raised the benchmark interest rate by half a percentage point, to a range of 0.75 percent to 1 percent after a previous slight increase in March.
This comes after inflation in the United States recorded its highest rise in 40 years, and inflation is expected to continue rising in the future.
The interest increase represents the latest US effort to contain the rising cost of living that has been afflicting families around the world.
More countries in the world have taken similar measures, with India’s central bank on Wednesday announcing a surprise rate hike, while the Australian central bank recently raised rates for the first time in more than a decade.
The Bank of England is also expected to raise interest rates on Thursday, which will be the fourth increase since December.
“Inflation is very high and we understand the difficulties it is causing,” US Federal Reserve Chairman Jerome Powell said at a news conference in Washington on Wednesday.
He stressed that they are “moving quickly to reduce inflation.”
By raising interest rates, banks will make borrowing more expensive for individuals, businesses and governments, while encouraging them to deposit money to take advantage of the higher interest.
This will, according to expectations, cool the demand for goods and services and affect purchasing power, which will help ease price inflation.
picture released, Archyde.com
US Federal Reserve Chairman Jerome Powell said they are moving quickly to curb inflation
But these decisions are putting the world at risk of a sharp economic slowdown, especially with the emergence of new challenges, such as the war in Ukraine and the recent shutdowns in China due to the outbreak of the Covid-19 virus.
Economist Donald Cohen, who previously served on the Federal Reserve’s rate-setting committee, commented that there is a “narrow path to go”, “that is going to be a very difficult task.”
Standard inflation
The inflation rate in the United States reached 8.5 percent last March, the highest annual rate since 1981, and the situation was exacerbated by the acceleration in the rise in food and energy costs.
This far exceeds the US central bank’s target of 2 percent, and this rise has become a growing political issue for US President Joe Biden.
Many economists believe that the Federal Reserve has been slow to respond to this problem, which is affected by several factors, including supply shortages related to the outbreak of the Covid-19 virus, the shock to energy markets due to the war in Ukraine, in addition to the massive government spending in the United States to support the economy after the spread of the epidemic, and conducting checks Medical direct for families.
“They’re way behind the curve. I think most central banks are behind,” said Thomas Honig, a fellow at George Mason University’s Mercatos Center who spent nearly 40 years at the Fed.
“But if they try to correct this mistake with another mistake, that is, shock economies with very large increases in interest rates, I think they will pay a heavy price in terms of potential recession for it,” he added.
The decision to raise interest rates on Wednesday came unanimously. The Fed’s levy on banks will push banks to borrow between 0.75 percent and 1 percent, with higher costs for consumers in the form of more expensive mortgages, credit cards and other loans.
The bank has also detailed plans to remove economic support by ending its balance sheet, which has ballooned during the pandemic as it has bought assets, including US government debt and mortgage-backed securities, to boost the economy.
Starting in June, the bank said it would cut its holdings by $47.5 billion a month, to $95 billion in September.