Federal Reserve raises key interest rate 0.75% as it tries to calm inflation

The Federal Reserve said on Wednesday that it is raising its benchmark interest rate by three-quarters of a percentage point, the sharpest hike since 1994, as it seeks to combat the fiercest surge in US inflation in four decades.

The US central bank set its target rate in the range of 1.5 to 1.75%. The federal funds rate, which controls how many banks pay to borrow money from each other, affects borrowing costs for consumers and businesses.

The Fed had previously suggested it was likely to boost rates by half a percentage point at each of its three meetings this year, but recent signals that inflation is accelerating spurred policymakers to move more aggressively to slow economic growth in a bid to tame prices.

“The labor market is extremely tight, and inflation is much too high,” Federal Reserve Chairman Jerome Powell said in a press conference Wednesday.

“My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation,” he said.

Powell said the Fed is likely to continue raising rates, in increments of 0.5% or 0.75%, as it tries to tamp down demand for labor. Cooling the job market should reduce wage growth, helping to mute price increases, Powell said.

Ukraine impact

In raising interest rates, the Federal Open Markets Committee noted in its policy statement that Russia’s war in Ukraine and ongoing supply-chain struggles are “creating additional upward pressure on inflation and are weighing on global economic activity.” In addition, “COVID-related lockdowns in China are likely to exacerbate supply chain disruptions,” the committee said.

The Fed expects inflation to gradually fade this year, although less slowly than it previously forecast. Policymakers project that personal consumption expenditures — the Fed’s preferred inflation gauge — will decline to 5.2% by year-end, 2.6% in 2023 and 2.2% in 2024.


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Stocks rose on the news. The S&P 500 gained 1.3% after the announcement, while the blue-chip Dow climbed 1% and the tech-heavy Nasdaq added 2.3%.

“The Federal Reserve did not disappoint market expectations, responding to last week’s upside surprise in consumer prices and a rise in inflation expectations, which suggested more aggressive action,” Rubeela Farooqi, chief US economist with High Frequency Economics, said in a report.

an about face

The Fed has rapidly shifted gears this year from propping up the economy during the pandemic trying to choke off a surge in consumer prices, which have been rising at the fastest rate since the 1980s.

Yet the Fed’s move to jack up interest rates carries risks for the job market, consumers and businesses. Sharply higher borrowing costs could snuff out economic growth and cause a “hard landing,” or even a serious recession. That would drive up unemployment and undermine wage growth just as millions of US workers are getting back on their feet following the economic crash caused by the pandemic.

More broadly, wages for most workers have been stagnant for decades, leading to growing inequality and political instability. Using monetary policy to keep a lid on pay increases, while potentially a check on inflation, may do little to mute the soaring demand that is chiefly responsible for driving up inflation.

Powell said Wednesday that reducing the number of job openings, which would weaken the leverage workers have to demand better pay, would help stabilize the economy.

“You have two job vacancies, essentially, for every person actively seeking a job, and that has led to an imbalance in job negotiations,” he said.

While wages are not the main reason prices have jumped in the past year, “going forward, they’ll be critically important,” he added, saying, “We have to restore price stability. It’s the bedrock of the economy. Without it, the economy won’t work. People’s wages will be eaten up.”

slowing growth

The economy has slowed sharply this year, shrinking 1.4% in the first quarter amid a drop in US exports and reduced federal spending. The Fed expects the nation’s gross domestic product to expand 1.7% this year and in 2023 as higher interest rates act as a brake on economic activity.


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Economic growth remains solid, with unemployment near a 50-year low of 3.6% and businesses continuing to hire. But the steepest inflation since 1981 is hitting households hard and causing consumer spending to shrink, with the government reporting that retail sales fell in May. The 0.3% decline, the first such drop since December, is a sign that high gas prices may be forcing consumers to spend less on other purchases.

Last week, a sentiment survey by the University of Michigan found that Americans’ expectations for future inflation are rising, a worrisome sign for the Fed expectations because they can become self-fulfilling.

This is a developing story. The Associated Press contributed reporting.

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