US Federal Reserve raises interest rate by 75 basis points

Central bank makes biggest increase since 1994 to battle country's high inflation levels

The US Federal Reserve raised its target interest rate by three quarters of a percentage point on Wednesday to stem a disruptive surge in inflation.

The rate increase was the biggest made by the US central bank since 1994 and was delivered after recent data showed little progress in its inflation battle.

The Fed also projected a slowing economy and rising unemployment in the months to come.

“We thought strong action was warranted at this meeting,” Fed Chairman Jerome Powell said in a press conference after a two-day meeting. “And we delivered that.”

US central bank 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 committee is strongly committed to returning inflation to its 2 per cent objective."

The action raised the short-term federal funds rate to a range of 1.50 per cent to 1.75 per cent, and Fed officials at the median projected the rate increasing to 3.4 per cent by the end of this year and 3.8 per cent in 2023 — a substantial shift from projections in March in which the rate was projected to rise to 1.9 per cent this year.

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

President Joe Biden has fully endorsed the Fed's battle against the steepest rise in prices in more than 40 years, as he watches inflation erode his popularity and deflect attention from other milestones, including a rapid recovery of the world's largest economy and record job growth.

US central bankers began raising interest rates off zero in March as buoyant demand from American consumers for homes, cars and other goods clashed with transport and supply chain snarls in parts of the world where Covid-19 remained — and remains — a challenge.

That fuelled inflation, which worsened after Russia invaded Ukraine in late February and western nations imposed steep sanctions on Moscow, sending food and fuel prices up at a blistering rate.

US petrol prices have topped $5 a gallon for the first time ever and are setting new records daily.

Economists thought March was the peak for consumer price rises, but the rate spiked again in May, jumping 8.6 per cent in the last 12 months, and wholesale prices surged as well, almost entirely due to soaring costs for energy, especially petrol.

The Fed was caught off guard with the speed of the price increases and while policymakers usually prefer to clearly telegraph any policy shift to financial markets, the latest data likely changed the calculus.

Mr Powell has indicated policymakers were poised to enact another half-point increase in the benchmark borrowing rate next month, aiming to douse red-hot inflation without tipping the economy into recession and avoid a bout of 1970s-style stagflation.

“I do not expect moves of this size to be common,” he said. “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.”

However, the central bank cannot influence supply issues and rate increases only work by cooling demand and slowing the economy — meaning policymakers are walking a fine line between having an impact and doing too much.

But the impact will not be immediate.

“Monetary policy operates with lags, today's inflation reflects decisions taken a year ago,” said Adam Posen, head of the Peterson Institute for International Economics and a former central banker.

“Had Fed hiked in 2021 Q2/Q3, then inflation now would be different — not least [because] the current global shocks wouldn't be piling on already high inflation,” he said on Twitter.

Agence France-Presse contributed to this report