The United States central bank pushed interest rates on Wednesday to the highest level in almost 15 years in a bid to rein in soaring prices in the world’s largest economy.
It’s a third rise in months, and is the latest in a series of borrowing cost increases, as the central bank tries to dial back near-historic inflation while avoiding an economic downturn.
The Fed raised the benchmark interest rate by 0.75%, repeating the same hike it imposed at each of the last two meetings. It lifts the target range to 3% to 3.25%. The Fed last matched a hike of this magnitude in 1994.
Inflation rates are rising alarmingly, adding woes for American households and sending the S&P 500 tumbling for its worst day of 2022.
The Fed’s strategy risks tipping the US into a recession and putting millions out of work just when the American economy was recovering after two years of COVID impact. Borrowing costs are expected to climb more - and remain high, the bank said.
Federal Reserve chairman Jerome Powell has said the rate rises are necessary to slow demand, easing the pressures putting up prices and avoiding long-term damage to the economy.
Banks in nearly every country - with the big exceptions of Japan and China - are taking similar steps to tackle their own inflation problems.
The Bank of England is widely expected to announce its seventh consecutive rate rise at its meeting on Thursday, while Indonesia and the Philippines are also poised for increases.
Fears that the British economy is already in recession after a much bigger-than-expected decline in retail sales triggered heavy selling of the pound on international money markets to a fresh 37-year low against the dollar last week. Even the Cayman Islands dollar is on par with sterling right now, when for years it has been closer to the value of the US dollar.
With average UK wages continuing to fall behind rising prices and the Bank of England expected to push up interest rates next week, sterling fell by more than 1% against the US currency to $1.135, its lowest since 1985. On the 30th anniversary of Black Wednesday when the UK crashed out of the European exchange rate mechanism, the pound also hit a 17-month low against the euro, with €1 worth 87.66p.
Analysts worry that the global sweep of the rate hikes, which ripple out to the public in the form of more expensive mortgages, loans and credit card debt, could lead to a global recession. Russia’s continuing invasion of Ukraine adds to the economic global downturn.
“That is definitely one of the downside risks - that the synchronised nature of the tightening could make it that much more powerful,” said Brian Coulton, chief economist at Fitch Ratings.
In the US, the Fed is raising rates at one of the fastest paces in its modern history, a sharp reversal after years of low borrowing costs.
Wednesday’s increase - the fifth in a row - lifts the rate the Fed charges banks to borrow from near zero at the start of the year to 3% for the first time since 2008.
Forecasts released by the Fed on Wednesday show policymakers expect it to reach 4.4% by the end of the year - and rise to 4.6% in 2023, sharply higher than its prior forecasts.
“What is striking is the speed,” Mr Coulton said. “They’re having to move very quickly ... and it means it’s more likely to be a surprise to firms and households.”
With the alarming rise in food prices, utility bill charges, gas rises and overall cost of living worldwide, millions more will suffer.