WASHINGTON – The Federal Reserve on Wednesday stepped up its fight against high inflation, raising its key interest rate by three-quarters of a point – the biggest rise since 1994 – and pointing to higher rate hikes ahead as it tries to cool the US economy without causing a recession.
The unusually high rate hike came after data released on Friday showed that US inflation rose last month to a four-decade high of 8.6%, a surprise jump that made financial markets worry about how the Fed would respond. The Fed’s short-term benchmark rate, which affects many consumer and business loans, will now be in the range of 1.5% to 1.75%, and Fed officials predict a doubling that range by the end of the year.
“We thought strong action was warranted at this meeting, and we did,” Fed Chairman Jay Powell told a news conference. inflation at the Fed’s target rate. 2%, although this led to a slightly higher unemployment rate.
Powell said it was essential to go beyond the half-point increase the Fed had previously indicated because inflation was rising more than expected, causing particular difficulties for low-income Americans, and that the expectation of public rise in inflation has become stronger.
Powell said another three-quarters-point rise is possible at the next Fed meeting in late July if inflationary pressures remain high, though he said such increases would not be common. He said the economy is strong enough to withstand higher rates without falling into recession, a prospect many economists are increasingly concerned about.
Some financial analysts suggested that Powell had struck the right balance to reassure the markets, which recovered on Wednesday. “We want to bring down inflation,” he said, adding that “we want a smooth landing,” said Robert Tipp, chief investment strategist at PGIM Fixed Income.
Still, Fed action on Wednesday was a recognition that it is struggling to slow the pace and persistence of inflation, which is fueled by a strong labor market, pandemic-related supply disruptions and the rise. of energy prices that have been aggravated by the invasion of Ukraine by Russia. .
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