The Federal Reserve raised interest rates by 0.75 percentage point on Wednesday. By making borrowing more expensive as a result, the Fed hopes to curb inflation. Policymakers want to bring inflation back to the 2 percent target. Interest rates are expected to rise further this year.
Due to the interest rate step, the key interest rate is at 1.5 to 1.75 percent. That could be 3.4 percent by the end of this year. Another 0.75 percent rate hike may follow in July, Fed chief Jerome Powell warned. He said at the same time that he did not expect that movement of this magnitude will be common.
An interest rate step of three quarters of a percentage point has not occurred since 1994. The rate hike is also slightly larger than the Fed initially announced. In the markets, however, a firmer intervention was expected. Especially after last week it turned out that inflation is also rising faster than expected in the largest economy in the world.
With interest rates increasing, it becomes more expensive for individuals and companies to borrow money. This in turn causes less money to be spent and the demand for goods to decrease. Prices will then rise less rapidly, causing inflation to decrease.
After the announcement, yields on two-year government bonds rose. US equities also fell. The dollar made up for an earlier loss.
Inflation has also risen sharply in the US
Besides the European countries, inflation has also risen sharply in the US. In May inflation rose to 8.6 percent, the highest level in more than 40 years.
The high inflation is partly due to the increased fuel prices due to the war in Ukraine. Foods have also become more expensive, causing many American households to see their purchasing power decline. Consumer economic confidence in the US, meanwhile, has fallen to an all-time low. Fighting inflation is his administration’s top domestic priority, according to President Joe Biden.
Central bankers have revised their economic outlook downwards. Experts now assume a growth of 1.7 percent this year. That was 2.8 percent in the estimate in March. Powell said in a statement that the Fed is determined to reduce inflation.
Powell is due to appear before Congress next week. He is expected to be addressed there about the performance of the central bank.
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