The U.S. central bank, the Federal Reserve, raised its benchmark interest rate by a half percentage point on Wednesday and scaled back its support for the American economy, a pointed effort to curb surging inflation in the world’s largest economy.
The interest rate increase, pushing its federal-funds rate to a target range between 0.75% and 1%, was the largest since 2000, and could quickly ricochet through the U.S. economy, increasing borrowing rates for businesses and consumers alike, with the goal of curbing spending and cutting inflation. The Fed usually increases interest rates in quarter-point increments.
The cost of consumer goods has been spiraling for months in the U.S., and an 8.5% year-over-year increase was recorded in March, the biggest jump in four decades. U.S. consumers are paying sharply higher prices for food, housing and gasoline at service stations, squeezing family budgets.
Aside from increasing the interest rate, the Fed said that starting next month it would scale back its $9 trillion asset portfolio in another move to curb inflation.
After a two-day meeting in Washington, the Fed said in a statement, “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain.”
It added, “The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions” in world trade.
After the meeting, Fed chairman Jerome Powell said at a news conference that “inflation is much too high, and we understand the hardship it is causing.”
But he said the Federal Reserve has various measures it can take over the coming months to bring the inflation rate to the Fed’s 2% average target, but not so fast that it sends the U.S. economy into a recession.
Ahead of this week’s meeting, policymakers had already said they could raise interest rates several more times through the end of 2022 to slow the surge in consumer prices.