New Delhi: The US Federal Reserve has raised its benchmark interest rates by 0.75 percentage points to the range of 3.75 to 4 percent, the highest level in over two decades, as it continues to ramp up its fight against inflation.
This is the eleventh rate hike since the Fed started its tightening cycle in March 2022 and comes only one month after the central bank hit ‘pause’ to assess the state of the economy after the failures of three regional banks since the spring.
The Fed said in a statement that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. It also noted that inflation has declined from its peak earlier this year, but remains above its 2 percent target.
The Fed reiterated that it expects further gradual increases in the federal funds rate, which affects the cost of borrowing for consumers and businesses until it reaches a neutral level that is neither stimulating nor restraining the economy.
The Fed’s aggressive campaign is intended to beat down inflation, which has been fueled by supply chain disruptions, labor shortages, fiscal stimulus, and pent-up demand amid the pandemic recovery. Based on the latest reading, inflation as measured by the Consumer Price Index grew at just 3 percent in June. And the Fed’s preferred inflation measure — the core Personal Consumption Expenditures Index — inched down to 4.6 percent in its latest reading². In either case, both numbers are still above the Fed’s 2 percent target, which suggests the US central bank may not be done quite yet.
The Fed’s decision was widely expected by investors and analysts, who have been closely watching the economic data and the Fed’s signals for clues on its policy path. The US stock market was steady on Wednesday after the announcement, while the US dollar strengthened and Treasury yields rose slightly.
The Fed’s rate hikes have implications for borrowers and savers around the world, as they affect global financial conditions and capital flows. Higher US rates can attract foreign investors, putting pressure on emerging market currencies and debt. They can also make borrowing more expensive for households and businesses, potentially slowing down economic growth and spending.
The Fed’s next policy meeting is scheduled for September 19-20, when it will also update its economic projections and interest rate forecasts.