Fed Raises Interest Rates by 0.75%, Biggest Rate Hike Since 1994
The Federal Reserve on Wednesday raised interest rates by 0.75%, the largest move it has made in a single meeting since 1994.
The Federal Reserve on Wednesday approved its largest interest rate increase in more than a quarter of a century to stem a surge in inflation that U.S. central bank officials acknowledged may be eroding public trust in their power, and being driven by events seen increasingly out of their hands.
During today’s Federal Open Market Committee meeting, Fed Chairman Jerome Powell announced that the U.S. central bank would be raising its funds rates by 75 basis points, or 0.75%, bringing its benchmark short-term rate to a range of 1.5% to 1.75%. The decision was the result of a vote from the Federal Open Market Committee, the bank’s monetary policymaking body.
Markets responded negatively, though not catastrophically, in short term. The S&P 500 and Nasdaq-100, which were up by 0.85% and 0.75% in the hour before the meeting, were at 0.50% and 0.95% at the time of writing. Bitcoin and Ethereum, already struggling at -6% and -10% on the day, fell to -8% and -11% respectively.
The Federal Reserve has been raising interest rates in an effort to combat inflation in the U.S. Economists were surprised when the Consumer Price Index (CPI) officially hit a four-decade high of 8.6% in May. Food, shelter, and gasoline prices have been the highest to rise, according to data published by the U.S. Bureau of Labor Statistics.
The CPI print signaled the central bank would likely keep pursuing its quantitative tightening policy, making credit more expensive and shrinking the circulating supply of money within the economy. Powell had previously expressed his concern that raising rates too high and too fast could end up triggering a recession.
The policy has already resulted in significant market downturns, with the SPX and NASDAQ having lost about 22% and 31% of their late 2021 all-time high values. Bitcoin and Ethereum have experienced much worse turmoil and are currently trading at around $20,700 and $1,080; a decrease of 69% and 77% respectively.
The 75-basis point hike marks the Fed’s largest interest rate raise since 1994. It had previously raised rates by 0.25% on Mar. 16 and by 0.50% on May 4, which were the first rate hikes since 2018. More raises in rates are expected through the end of the year.
The Fed’s economic projections suggests a confidence among policymakers that a more aggressive rate hike path will cool inflation. Although the central bankers raised their expectations on inflation for 2022, the median member of the committee expects to see the pace of headline price increases to cool to 2.6% next year. These forecasts suggest inflation could further in 2024 to 2.2%, much closer to the Fed’s 2% target.
