USA News

Fed hikes rates by 75 basis points for first time since 1994

(The Hill) — The Federal Reserve announced Wednesday it would hike interest rates this month at the fastest pace in nearly 30 years after a discouraging May surge in inflation.

The Federal Open Market Committee (FOMC), the panel of Fed officials responsible for setting interest rates, said it would raise the bank’s baseline interest rate range to 1.5 to 1.75 percent, an increase of 0.75 percentage points. 

It is the first 0.75 percentage point rate hike issued by the Fed since 1994.

The Fed’s unusually large interest rate hike follows a tumultuous four-day stretch for financial markets. Stocks have plunged, bond yields have skyrocketed and cryptocurrency values have collapsed in the wake of an alarming increase in price growth last month. 

The Labor Department announced Friday that the consumer price index (CPI), a closely watched gauge of inflation, rose 1 percent in May alone and 8.6 percent over the past 12 months — far exceeding the expectations of economists. Experts were also alarmed by how many goods and services saw rapid price growth in May, along with the staggering rise in food and energy prices driven by the war in Ukraine.

The Fed was already on track to raise interest rates by 0.5 percentage points in June following an identical hike in May and a 0.25 percentage point hike in March. While Fed Chair Jerome Powell and other top bank officials left the door open to a larger or smaller hike, they made clear they expected another 50 basis point hike to be the best path forward. 

Fed officials are often wary of breaking from the decisions they signal in advance to financial markets, particularly as it navigates interest rate hikes. But a Monday financial market meltdown prompted many Wall Street Fed watchers to boost their odds of a 75 basis point hike. Several news outlets later confirmed the Fed was mulling a bigger rate increase, laying the groundwork for Wednesday’s decision.

The CME Group FedWatch tool, which monitors where futures tied to the Fed’s baseline interest rate range are trading, gave a 97 percent chance on Tuesday of a 75 basis point interest rate hike.

Borrowing costs for consumers and businesses are set to rise in the wake of the Fed’s decision. 

Banks and lenders set interest rates on credit cards, auto loans, adjustable rate loans and other shorter-term credit products they offer based on the Fed’s baseline interest rate range. As the Fed hikes rates, interest rates on those products also rise and pin consumers down with higher borrowing costs.

While mortgage interest rates are not directly tied to the Fed’s baseline interest rate range, they will also continue to rise. Banks and lenders set interest rates for mortgages and other longer-term loans based on the yields for Treasury Department bonds. When Treasury bond yields rise as the Fed hikes rates, banks and lenders set their interest rates higher accordingly.

The Fed is aiming to bring inflation down by reducing the amount of spending on goods and services, particularly those already in high demand and short supply. As consumers and businesses cut back on spending, firms may not be able to keep raising prices with less demand for their products. 

Tighter interest rates also tend to reduce stock prices and housing prices, which can prompt wealthier households to cut back spending or boost saving to compensate.

Home sales have already declined sharply in 2022 after two years of torrid growth as mortgage rates have risen. Several major retail chains are also bracing for lower earnings as consumers spend less on products like electronics and furniture.

Even so, economists and investors are increasingly concerned the Fed may need to deliberately induce a recession in order to bring inflation down. Prices for food, energy and other essential commodities have skyrocketed in the wake of the war in Ukraine and the Fed has little control over the international supply shocks. 

Persistent COVID-19 lockdowns in China are also choking off global supply chains and deepening backlogs behind rising prices.

File source

Tags
Show More

Related Articles

Back to top button
Close