The US Federal Reserve’s Open Market Committee decided on Wednesday raise interest rates The federal funds rate hit 75 basis points to reach a range of 3% to 3.25%, the highest level since the beginning of 2008.
The decision was part of the US Central Bank’s rigid policy approach to address record inflation rates.
Policymakers also indicated that by early 2023 they expect much higher rates than the June forecast.
The Fed’s action came on the heels of a government report last week that showed higher costs spread more widely across the economy, with hikes in rents and other services exacerbating despite some pre-inflationary factors. as gas prices have eased.
This is the third consecutive 75bp hike, as U.S. central bank governors moved aggressively to crack down on the strongest rise in inflation in more than four decades, to avoid a recession in the world’s largest economy.
The hikes that began in March and from near zero are the Fed’s most stringent since it started using the money rate as its main tool in 1990. The only comparison was in 1994, when the Fed raised a total of 2.25%. points; The interest rate cut will begin by July of the following year.
In addition to massive interest rate hikes, Fed officials have indicated plans to continue rising to 4.6% in 2023.
Interest rate cuts are not expected until 2024. Federal Reserve Chairman Jerome Powell and his colleagues have pointed out in recent weeks that rate cuts are unlikely next year as the market is evaluating.
FOMC members indicate that they expect higher interest rates to have consequences. The decision to raise interest rates affects the interest levels between banks or between banks that lend to their customers. All variable rate loans are also adjusted, allowing this increase to be passed on to home loans, credit cards and car loans.
Consumers and businesses should therefore borrow and spend less, calming the economy and slowing inflation.
Fed officials said they are looking for a “soft landing” that will allow them to slow growth enough to tame inflation, but not so much to trigger a recession.
However, increasingly, economists say they believe that strong rate hikes by the Federal Reserve, over time, will lead to job cuts, rising unemployment and a full-blown recession later this year or at the beginning of the next.
Reserve chairman Jerome Powell acknowledged in a speech last month that the bank’s moves “would bring some pain” to households and businesses. He added that the Fed’s commitment to reduce inflation to the 2% target is “unconditional”.
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