The US Federal Reserve raised its benchmark lending rate today by 75 basis points, the largest increase since 1994, as it struggles to contain inflation that has surged to four-decade highs.
The Federal Open Market Committee (FOMC) lifted the federalfunds target rate to a range of 1.5-1.75pc at the end of its two-day policy meeting. The increase followed a half-point increase at its prior policy meeting,
"Inflation remains elevated, reflecting demand and supply imbalances related to the pandemic, higher energy prices, and broader price pressures," the FOMC said in a statement. Russia's invasion of Ukraine and related events "are creating additional upward pressure on inflation."
A report last week from the Labor Department showed consumer prices in May surged at an annual rate of 8.6pc, the most since 1981. A separate report yesterday showed prices paid to producers in May rose at an annualized clip of 10.6pc, a sign thatinflationary pressures continue to build.
Inflation began surging in mid-2021 as pent-up consumer demand was unleashed following the Covid-19-induced recession. Snarled supply chains combined with Russia's invasion of Ukraine in February exacerbated price hikes, particularly for energy and grains.
The surge in inflation globally has triggered shock waves in financial markets, with the S&P 500 index posting a 20pc decline since January, US mortgage rates surpassing decade highs and analysts raising the odds of a recession.
US gasoline prices this week reached an average of $5/USG, a record high in nominal dollar terms. Spiking fuel and food costs are bedeviling President Joe Biden's administration just five months before mid-term elections that could see the Democratic party lose its narrow majority in the Congress.
The Fed's string of rate increases, which began in March with a quarter-point hike, the first since 2018, has been accompanied by the end of asset purchases known as quantitative easing and the beginning of quantitative tightening, as the Fed allows its balance sheet of bonds to mature without being replaced.
The federal funds rate is the rate banks charge each other for overnight loans and affects the rates that banks and lending institutions charge to businesses and individuals.
