US Federal Reserve increases interest rate by 0.5% to combat inflation – the biggest hike in decades | Business News

The US Federal Reserve has increased its benchmark interest rate by 0.5% to combat inflation – the sharpest hike in 22 years.

The American central bank increased the rate for the second time in two months after inflation surged to a 40-year high of 8.5% in March.

The change puts the Fed’s key short-term rate at a range of 0.75% to 1%, the highest point since the pandemic struck two years ago.

The rise will make it costlier for people, businesses and governments to borrow.

Comments by Fed chairman Jerome Powell and other Fed officials ahead of Wednesday’s announcement have already led to higher rates showing up in everyday borrowing transactions for products like homes and cars, according to Gus Faucher, senior vice president and chief economist of the PNC Financial Services Group.

“Where we’re more likely to see them [higher rates] show up now in is short-term borrowing costs,” he told NBC News, giving one-year adjustable-rate mortgages as an example.

The Fed has been under pressure to cool off a pandemic recovery that has produced strong job growth and increased wages but led to soaring prices across a range of services from petrol to property.

A key driver of inflation has been fuel prices, which grew after Russia’s invasion of Ukraine and peaked in March.

“Inflation is much too high and we understand the hardship it is causing,” Mr Powell said.

“We are moving expeditiously to bring it back down.”

In a statement, the Fed said the war in Ukraine is “likely to weigh on economic activity”, adding that COVID-related lockdowns in China are “likely to exacerbate supply chain disruptions”.

The Fed has been criticised by some who say it was too slow to start tightening credit and may end up having to raise its rates so aggressively that it will spark a recession.

‘One in three chance of recession’

On Wednesday it signalled further sharp hikes to come, which are widely expected to come in the form of a half-point rate hike at its next meeting in June and potentially another one after that, in July.

However, Mr Powell said the Fed was not “actively considering” a 75 basis-point rate hike.

Some economists believe that inflation likely peaked in March, meaning the Fed will be able to slow its pace of interest rate hikes.

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Among them is Ian Shepherdson, of Pantheon Macroeconomics, who told clients on Monday that “the rollover in housing demand, the impending steep drop in inflation, and the broad tightening of financial conditions” were good reasons to prevent “endless” rate hikes.

He said this would probably not prevent the increase in June but could impact what happens in July.

Mr Faucher warned that the US could still face a recession in the next two years, putting the odds at about one in three.

“The Fed may decide we need to experience a mild recession to bring down wage-inflationary pressures,” he said. “But the good news is starting from a very good place in the labour market.”

“Right now the economy looks good,” he continued.

“We’ve got good job growth, good consumer spending growth, so we are not in imminent danger of a recession – but the risk is elevated, and even if we don’t get a recession, things are going to be bumpy the next couple of years.”

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