The Federal Reserve has raised its benchmark interest rate by 75 basis points to a range of up to 1.75 percent, its most aggressive rise in nearly 27 years, while the US central bank strives to curb rampant inflation.
The bank rate, known as the federal funds rate, affects the rates borrowers and savers get from banks, especially variable rate mortgages.
The bank was expected to raise its rate by half a percentage point, but these expectations have risen in recent days, as data show that the US inflation rate has not yet reached its peak. 8.6 percent a year through May.
“Inflation remains high, reflecting pandemic-related supply and demand imbalances, rising energy prices and broader price pressures,” the bank said in explaining its decision.
Canada’s inflation rate is likely to rise
Central banks cut their rates when they want to stimulate the economy by encouraging people and businesses to borrow and invest. And they raise rates when they want to raise debt, to try to cool an overheated economy.
This is a fitting description of economies around the world right now, as the cost of living is rising at its fastest pace in decades.
Canada’s inflation rate is 6.8%, the 31-year high, and is expected to rise when the latest figures come out next week.
The Bank of Canada has already raised its interest rate three times this year, from 0.25 per cent earlier this year to 1.5 per cent now, in an attempt to cool things down.
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The US central bank has not raised its rate by 75 basis points since 1994.
At the time, it was in the middle of seven rises for a span of more than a year, as the then Federal Reserve raised its rate from three to six percent to try to avoid high inflation.
More large rate hikes are expected
Borrowing costs have risen sharply even before the Fed’s last move.
The 30-year average fixed-rate mortgage rate exceeded six percent this week, its highest level since before the 2008 financial crisis. That’s twice the rate as recently as February.
The value of all types of investments, from housing to stocks to bitcoin, has plummeted in recent months as investors face the reality of high inflation and purchasing power. reduced.
Even with the almost unprecedented 75-point increase, markets expect more large rate hikes this year, due to the big problem that inflation is proving to be.
“Inflation has been on the rise this year and there could be more surprises,” Federal Reserve Chairman Jerome Powell told a news conference after the decision.
In their updated forecasts, Fed officials said that after this year’s rate hikes, they expect two more rate hikes by the end of 2023, when they expect inflation to finally fall below 3%. . But they expect inflation to still be 5.2 percent by the end of this year, about twice the range they like to see.
“The outlook has been blurred when it comes to controlling inflation in the short term,” Michael Gregory, chief economist at the Bank of Montreal, said in an interview with CBC News.
“The Fed has basically increased the … bet, and now we’re going to get over three percent by the end of this year.”