US Federal Reserve again raised interest rates, increased interest rates by three quarters to reduce inflation

US Federal Reserve again raised interest rates, increased interest rates by three quarters to reduce inflation

The Federal Reserve raised the interest rate by three-quarters of a percent overnight on Wednesday in an effort to quell the sharpest breakout of inflation. In the 1980s, the "ongoing increase" in borrowing costs still lay ahead, despite evidence of a slowing economy. "Inflation has risen, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the Federal Open Market Committee said. "Recent indicators of spending and production have moderated," Fed officials said in an official statement. "Still, job gains have strengthened in recent months, and the unemployment rate remains low." In earlier months, the central bank had noted higher energy prices, but this is the first month they have included rising food costs in their analysis.

When the pandemic first hit the United States, the Fed launched a series of emergency measures to support the economy, including slashing the interest rate to zero, leaving it virtually free to borrow money. But while that "easy money" policy encouraged spending by households and businesses, it also fueled inflation and contributed to today's warming economy. Now that the economy no longer needs support from the Fed, the central bank is taking steps to "remove the punch bowl" and slow the economy by raising interest rates.

US central bank raised interest rates by 75 basis points for two consecutive terms

The Fed's actions will increase the rate that banks charge each other for overnight borrowing from 2.25% to 2.50%, the highest since December 2018. Over the past three decades, the Fed has raised or lowered its benchmark interest rate by an average of 25 basis points, preferring to keep the economy running at a slower pace. But rising inflation forced the central bank last month to implement a rate hike of three times that size, the first time the Fed has raised a 75-basis-point increase since 1994. Wednesday's rate hike represents the first time in modern Fed history that the central bank has raised interest rates by 75 basis points for two consecutive terms.

Federal Reserve Chairman Jerome Powell has said that the biggest risk to the economy will be persistent inflation, not an economic slowdown. In the past 11 tight cycles, the Fed has successfully avoided recession only three times. During each of those cycles, inflation was lower than it is today. This has irked some analysts and market participants. "Soft landing seems like a long shot from here," said Seema Shah, chief strategist at Principal Global Investors. “Fed policy may not directly affect food or energy inflation, while rate hikes have so far done little to slow down core CPI [consumer price index] components, which have traditionally been more responsive to monetary policy. "

Know what it says: Recent figures from the Bureau of Labor Statistics

US consumer prices hit a new pandemic-era peak in June, jumping 9.1% year over year, according to the most recent data from the Bureau of Labor Statistics. This is higher than the previous reading when prices were up 8.6% for the year ending in May. Money tight for many American households: New data from the Bureau of Economic Analysis shows Americans are saving far less than they were a year ago. In May, Americans saved just 5.4% of disposable personal income, down from 12.4% year over year. Meanwhile, the unemployment rate is near a 50-year low and has declined this year. A consistently strong labor market gives the Fed some leeway to change interest rates.

Why is the US central bank raising interest rates?

Inflation in the US is currently rising at the highest rate in 40 years. In the month of May, the inflation rate in the US was recorded at 8.6 percent. The Fed Reserve is taking the decision to increase the key interest rates only to check inflation.