WASHINGTON (AP) — The U.S. Federal Reserve stepped up its fight against inflation Wednesday by raising its benchmark interest rate by three-quarters of a point — its biggest increase since 1994 — and signaled future hikes as part of its strategy. to cool down the economy without triggering a recession.
The unusually large increase came after data released on Friday showed U.S. inflation rose last month to its highest in four decades, 8.6%, a surprise jump that made investors nervous. financial markets on how the Fed would respond. The central bank’s short-term benchmark rate, which affects many personal and commercial loans, will now be in a range of 1.5% to 1.75%, with Fed members forecasting that range will double by the end of the year.
“We thought strong action was needed at this meeting, and that is what we did,” Federal Reserve Chairman Jerome Powell said at a news conference in which he underscored the central bank’s commitment to do what it takes to achieve for inflation to decline to the Fed’s target rate of 2%, even if that results in a slight increase in the unemployment rate.
The official indicated that it was imperative to overcome the half-point increase that the Fed had previously indicated, because inflation was growing more than anticipated, particularly affecting low-income Americans and entrenching the public perception that there will be no solution. simple to a persistently high price rise.
Powell said another three-quarters of a point hike may be mandated at the Fed’s next meeting in late July if inflation pressures remain high, though he clarified such hikes would not be common. He said the economy is strong enough to withstand higher interest rates without slipping into recession, a prospect that is increasingly worrying economists.
Some financial analysts hinted that Powell struck the right balance to reassure markets, which closed higher on Wednesday. “He made it clear that ‘we want to reduce inflation,’ but he also made it clear that ‘we want it to be done smoothly,’” said Robert Tipp, director of investment strategies at PGIM Fixed Income.
Either way, the Fed’s move on Wednesday is an acknowledgment that it is having a hard time curbing the pace and persistence of inflation, which is being driven by a strong labor market, supply chain disruptions related to COVID-19 pandemic and rising energy prices, which have been exacerbated by Russia’s invasion of Ukraine.
Some analysts welcomed the more aggressive stance of the central bank.
“The more the Fed does right now, the less it will have to do later on,” said Thomas Garretson, portfolio strategist at RCB Wealth Management.
Matthew Luzzetti, director of US economic affairs at Deutsche Bank, said Powell did the right thing by acknowledging that faster rate hikes will cause hardship for consumers. “Reducing inflation will be a more turbulent ride than previously anticipated,” he declared.