US Federal Reserve makes historic interest hike to combat inflation, may repeat in July
- The 0.75-percentage-point increase is the biggest since 1994, with the central bank’s chief saying another big raise could come next month to cool prices
- Stocks climbed, US Treasury yields tumbled and the dollar pushed lower following the decision
The Federal Reserve raised interest rates by three-quarters of a percentage point – the biggest increase since 1994 – and Chair Jerome Powell said officials could move by that much again next month or make a smaller half-point increase to get inflation under control.
Slammed by critics for not anticipating the fastest price gains in four decades and then for being too slow to respond to them, Chairman Jerome Powell and colleagues on Wednesday intensified their effort to cool prices by lifting the target range for the federal funds rate to 1.5 per cent to 1.75 per cent.
“I do not expect moves of this size to be common,” he said at a press conference in Washington after the decision, referring to the larger increase. “Either a 50 basis point or a 75 basis-point increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting.”
Officials projected raising it to 3.4 per cent by year-end, implying another 1.75 percentage points of tightening this year.
Stocks climbed, Treasury yields tumbled and the dollar pushed lower following the decision, which was more hawkish than the 0.5-percentage-point shift previously signalled by Powell. The Fed changed tack after a run of data showed inflation and expectations for it accelerating.
The median prediction of officials was for a peak rate of 3.8 per cent in 2023, and five forecast a federal funds rate above 4 per cent; the median projection in March was for 1.9 per cent this year and 2.8 per cent next. Traders in futures markets were betting on a peak rate of about 4 per cent ahead of the release.
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The Fed reiterated it will shrink its massive balance sheet by US$47.5 billion a month – a move that took effect June 1 – stepping up to US$95 billion in September.
The Federal Open Market Committee “anticipates that ongoing increases in the target range will be appropriate”, it said in a statement after a two-day meeting in Washington. “The committee is strongly committed to returning inflation to its 2 per cent objective.”
The central bankers also revised their outlook for the economy from the soft-landing scenario of March to a bumpier touchdown, underscoring the tough task Powell faces as he tries to tame inflation running about three times the Fed’s 2 per cent target without causing a recession.
Having just won Senate confirmation to a second four-year term, Powell must also re-establish the Fed’s inflation-fighting credibility with investors and with Americans who are furious over the soaring cost of living.
The Fed aims for 2 per cent inflation measured by the Commerce Department’s personal consumption expenditures price index, which rose 6.3 per cent in the 12 months through April, near a 40-year high.
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US Fed raises interest rates by 0.75 percentage point, the biggest hike since 1994
Policymakers now forecast the gauge to advance 5.2 per cent this year, up from 4.3 per cent in the March projections, based on the median estimate of Fed governors and regional presidents.
They forecast gross domestic product growth to slow to 1.7 per cent this year compared with a 2.8 per cent expansion projection in March. Unemployment could rise to 4.1 per cent at the end of 2024 from 3.6 per cent.
The FOMC vote, which included newly sworn-in governors Lisa Cook and Philip Jefferson, included a dissent from Kansas City Fed President Esther George, who preferred a half-point increase.
Powell will testify before Congress over two days next week, where he can expect to be challenged over his central bank’s performance.
