- The Fed raised interest rates by 0.5 percentage point, doubling the size of its usual rate hikes.
- The move escalates the central bank’s fight to slow the fastest price growth in decades.
- The hike will drive up borrowing costs for mortgages, car loans, and credit-card debt.
The
Federal Reserve
has officially doubled its pace for pulling inflation lower.
The Fed raised its benchmark interest rate on Wednesday by 0.5 percentage points, marking a considerably more aggressive move toward reversing pandemic-era support and cooling demand. The hike doubles the size of the central bank’s typical quarter-point increases and is the first of its magnitude since May 2000.
“With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong,” the Fed said in a statement. “In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate.”
The increase is the second of the central bank’s current hiking cycle following the 0.25-point uptick announced in March. The benchmark rate now has an upper limit of 1%, up from the 0.25% limit seen through much of the pandemic.
Economists and market participants widely expected a 0.5-point hike at the Federal Open Market Committee’s May meeting. Markets are currently pricing in similarly sized increases at the central bank’s June and July meetings before returning to 0.25-point hikes in the fall.
The double-sized increase will have dramatic effects on the economy in the coming weeks. The federal funds rate influences interest rates on practically every kind of borrowing. The 0.5-point hike will directly translate to higher mortgage rates, pricier car loans, and larger interest payments on credit card debt.
Savers, however, will benefit, as a higher benchmark rate means greater interest from savings accounts. By raising rates, the Fed can cool spending and make saving more attractive. That puts the brakes on economic growth and helps to close the gap between supply and demand that’s led to such high inflation.
By issuing a larger-than-usual hike, the Fed is betting that the economy is strong enough to keep recovering without as much monetary aid. It’s also accelerating its plans to counter the fastest price growth since 1981. Inflation became the US’s biggest economic ill as the Omicron wave faded in early 2022, and Russia’s invasion of Ukraine has only exacerbated the issue. The double-sized rate hike effectively lets the Fed pull forward some of its future increases in hopes of cooling inflation sooner.
Many aren’t too confident the central bank can solve the inflation issue without posing new problems for the economy. Bearish voices ranging from Wall Street banks to former Treasury Secretaries have raised concerns that the faster hiking cycle will slam the brakes on the recovery and possibly spark a new
It’s too early to say whether the Fed can achieve a so-called soft landing, in which inflation slows without a rise in unemployment. But as prices continue to surge higher and the economy continues to heal, the Fed’s Wednesday action marks a major escalation of the US’s war against inflation.
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