(The Hill) – The Federal Reserve raised its baseline interest rate range Wednesday by two times the size of a usual rate hike as the central bank sprints to get ahead of rising inflation.
The Federal Open Market Committee (FOMC), the panel of Fed officials in charge of monetary policy, boosted interest rates by 0.5 percentage points to a target range of 0.75 to 1 percent.
After leaving rates near zero for all of 2021, Fed Chair Jerome Powell and other bank leaders have pledged to quickly bring borrowing costs back toward levels that won’t stimulate the economy.
Top Fed officials all but confirmed they would hike rates by 0.5 percentage points in the weeks leading up to the May FOMC meeting after approving a 0.25 percentage point hike in March.
Consumer prices rose 6.6 percent over the 12 months ending in March, according to personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of inflation. The Fed aims for annual inflation of 2 percent each year.
“It may be that the actual peak was in March, but we don’t know that and so we’re not going to count on it,” Powell said during a panel discussion with top economic officials last month.
“We’re really going to be raising rates and getting expeditiously to levels that are more neutral.”
Interest rates for mortgages, automobile loans and other longer-terms loans were already rising in anticipation of the Fed’s decision. Rates on credit cards, short-term credit products and loans with adjustable interest rates — which lenders often tie to the Fed’s baseline interest rate range — are set to rise immediately.
Fed officials are hoping to bring inflation down by reducing consumer and business spending through higher interest rates. As households and businesses face higher borrowing costs, they could be less willing to spend money on goods and services. Lower demand for goods and services could prompt suppliers to reduce prices and curb plans to spend money on expanding their operations.
While Fed officials are aiming to slow the economy enough to reduce inflation without stopping growth altogether, a growing number of economists fear the bank may be unable to stop prices from rising without causing a recession.
When the Fed raises interest rates quickly to stop rising inflation, the steep rise in borrowing costs can slow the economy into a recession and an increase in unemployment.
- Venture capitalist donates $1.1 Billion to Stanford for climate change and sustainability school
- Lyft stock plunges after first quarter earnings report
Powell and Fed officials have expressed confidence the U.S. economy is strong enough to withstand higher interest rates without a stoppage in growth or joblessness rising.
The U.S. added 1.7 million jobs over the first three months of 2022 and had 11.5 million open jobs in March, according to the Labor Department, a figure that amounted to roughly two open positions for every unemployed American.
Even so, stubborn pandemic-related supply chain snarls, port backlogs, the war in Ukraine and slowing economic growth abroad may make it tougher for the Fed to curb inflation without adverse effects for the U.S. economy.