The Federal Reserve has raised its key interest rate by 0.5 percentage point. That is the largest interest rate increase since 2000. With this step, the US umbrella organization of central banks hopes to curb the sharp rise in inflation. In March, prices in the United States rose the fastest in almost 40 years.
It is the Fed’s second rate hike in a short time, but a much bigger one than the 0.25 percentage point step in March. More rate hikes are expected to come, which in the words of the central bankers will be “appropriate”. To curb inflation, the central bank umbrella is also reducing its balance sheet full of purchased bonds. This basically means that less money flows into the economy because the proceeds from those loans are not reinvested.
Like other central banks, the Fed launched massive stimulus at the start of the corona crisis to keep the US economy and financial markets running. Interest rates fell to an all-time low and the central banking system bought tens of billions of dollars of bonds every month to pump money into the economy.
After the unexpectedly rapid recovery of the economy last year, inflation had already started to rise, after which the Fed decided to gradually stop buying debt securities. The war between Ukraine and Russia, two important countries for raw materials such as gas, oil and grains, caused even stronger price increases. Now interest rates also have to go up, which makes borrowing money more expensive, so that the influx of money is expected to decrease. In theory, this will curb inflation.
In a statement, the Fed says it is “very attentive to inflation risks”. In addition, policymakers also pointed to new lockdowns due to corona in major Chinese cities, including the metropolis of Shanghai. These are “expected to exacerbate supply chain disruption,” which could push prices up further.
Other western central banks, such as those of the United Kingdom, Norway and Australia, have already raised interest rates. The European Central Bank (ECB), responsible for the eurozone, is still undecided. Vice President Luis de Guindos recently said that the historically low interest rates for the euro countries could go up in July, but that this is far from a certainty.
Fed announces biggest rate hike since 2000
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