Federal Reserve raises benchmark interest rate 0.75% as it tries to calm inflation, the sharpest hike since 1994, as it seeks to combat the fiercest surge in U.S. inflation in four decades. The federal funds rate, which controls how much 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.
Overall, the economy remains strong, with unemployment near a 50-year low of 3.6% and businesses continuing to hire. But the steepest inflation since 1981 is hitting households hards 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 because expectations can become self-fulfilling.
The world’s financial markets are preparing for the sharpest rise in US interest rates in almost 30 years, as America’s central bank took action to halt rising inflation.
The Frankfurt-based central bank said it was developing a new support tool and would also direct cash from debt maturing in a recently ended €1.7tn pandemic support scheme towards vulnerable eurozone countries.
“The pandemic has left lasting vulnerabilities in the euro area economy which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions,” the ECB said in a statement.
UK inflation to a 40-year high.
The Bank of England is expected to raise UK interest rates on Thursday, after the rise in UK inflation to a 40-year high. Despite some speculation of a 0.5 point increase, the City expects a 0.25 point rise to 1.25%.
News that the US measure of the cost of living had hit 8.6% – the highest in four decades – prompted a sharp sell-off in bonds and share prices, as investors took fright at the possibility of action to combat high inflation leading to recession.
Andrew Kenningham, the chief Europe economist at Capital Economics, said: “News that the ECB governing council is holding an emergency meeting today shows that policymakers are taking the threat of rising peripheral yields more seriously than they were last Thursday at their regular policy meeting.”
The Fed statement and remarks by Powell at a press conference immediately afterwards will be scrutinised to see whether further sharp increases in US rates are likely. Some analysts think the central bank will raise them by 0.75 points again next month.
