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US Federal Reserve raises interest rate by 75 bps; biggest hike since 1994

The decision comes in the backdrop of consumer price inflation hitting 8.6 percent in May, the highest since 1981, as energy and food costs surged.

June 16, 2022 / 12:11 AM IST
US Federal Reserve| Representative Image

US Federal Reserve| Representative Image


The US Federal Reserve on June 15 announced a three-quarter of a percentage point or a 75 bps hike in its target interest rate, in what is being seen as a move to curb the spiralling inflation.

The central bank, while announcing the rate hike, said it is "strongly committed" to returning inflation to two percent. It projected a slowing down of the country's economy in the months to come, and a likely increase in the rate of unemployment.

The 75 bps hike in key lending rate is the biggest since 1994, and was delivered after recent data showed little progress in its inflation battle.

The Fed officials flagged a faster path of increases in borrowing costs to come as well, more closely aligning monetary policy with a rapid shift this week in financial market views of what it will take to bring price pressures under control.


"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures," the central bank's policy-setting Federal Open Market Committee said in a statement at the end of its latest two-day meeting in Washington.


The statement continued to cite the Ukraine war and China lockdown policies as sources of inflation.


Also Read | US consumer price inflation accelerates to 40-year high of 8.6% in May


The action raised the short-term federal funds rate to a range of 1.50 percent to 1.75 percent, and Fed officials at the median projected the rate increasing to 3.4 percent by the end of this year and to 3.8 percent in 2023 - a substantial shift from projections in March that saw the rate rising to 1.9 percent this year.


The stricter monetary policy was accompanied with a downgrade to the Fed's economic outlook, with the economy now seen slowing to a below-trend 1.7 percent rate of growth this year, unemployment rising to 3.7 percent by the end of this year, and continuing to rise to 4.1 percent through 2024.


While no policymaker projected an outright recession, the range of economic growth forecasts edged toward zero in 2023 and the federal funds rate was seen falling in 2024.


The projections are a break with recent Fed efforts to cast tighter monetary policy and inflation control as consistent with steady and low unemployment. The 4.1 percent jobless rate seen in 2024 is now slightly above the level Fed officials generally see as consistent with full employment.


Since March, when Fed officials projected they could raise rates and control inflation with the unemployment rate remaining around 3.5 percent, inflation has stubbornly remained at a 40-year high, with no sign of it reaching the peak Fed policymakers hoped would arrive this spring.


Even with the more aggressive interest rate measures taken on Wednesday, policymakers nevertheless see inflation as measured by the personal consumption expenditures price index at 5.2 percent through this year and slowing only gradually to 2.2 percent in 2024.


Kansas City Fed President Esther George was the only policymaker to dissent in Wednesday's decision in preference for a half-percentage-point hike.


Fed Chair Jerome Powell is scheduled to hold a news conference at 2:30 p.m. EDT (1830 GMT) to elaborate on the latest policy meeting.


Inflation has become the most pressing economic issue for the Fed and begun to shape the political landscape as well, with household sentiment worsening amid rising food and gasoline prices.

With Reuters inputs
Moneycontrol News
first published: Jun 15, 2022 11:32 pm