The Fed hikes interest rates by 75 basis points for the first time since 1994

(The hill) — The Federal Reserve announced on Wednesday that it would raise interest rates at its fastest pace in almost 30 years this month after a disheartening rise in inflation in May.

The Federal Open Market Committee (FOMC), the panel of Fed officials responsible for setting interest rates, said it would raise the bank’s base rate range to 1.5 to 1.75 percent, an increase from 0. corresponds to 75 percentage points.

It is the Fed’s first rate hike of 0.75 percentage points since 1994.

The Fed’s unusually large rate hike follows a turbulent four-day period for financial markets. Stocks have tumbled, bond yields have soared and cryptocurrency values ​​have plummeted on an alarming surge in price growth over the past month.

The Labor Department said on Friday that the Consumer Price Index (CPI), a closely watched indicator of inflation, rose 1 percent in May alone and 8.6 percent over the past 12 months — far exceeding economists’ expectations. Experts were also alarmed by how many goods and services saw rapid price increases in May, along with the staggering rise in food and energy prices caused by the war in Ukraine.

The Fed was already on track to hike interest rates by 0.5 percentage point in June after raising rates by 0.25 percentage point in May and March. While leaving the door open to a larger or smaller hike, Fed Chair Jerome Powell and other senior bank officials made it clear that they believe another 50 basis point hike is the best way forward.

Fed officials are often reluctant to deviate from the decisions they signal to financial markets in advance, especially when it comes to rate hikes. But a collapse in financial markets on Monday prompted many Wall Street Fed observers to increase their chances of a 75 basis point hike. Several news outlets later confirmed that the Fed was considering a larger rate hike, laying the groundwork for Wednesday’s decision.

CME Group’s FedWatch tool, which monitors where futures tied to the Fed’s base rate range are traded, gave a 97 percent chance of a 75 basis point rate hike on Tuesday.

Borrowing costs for consumers and companies are likely to rise as a result of the Fed’s decision.

Banks and lenders set the interest rates on the credit cards, auto loans, adjustable-rate loans, and other shorter-term lending products they offer based on the Fed’s base rate spread. When the Fed raises interest rates, interest rates on those products also rise, forcing consumers to pay higher borrowing costs.

Although mortgage rates are not directly tied to the Fed’s base rate range, they will continue to rise. Banks and lenders set interest rates on mortgages and other longer-term loans based on Treasury bond yields. If Treasury yields rise while the Fed raises rates, banks and lenders raise interest rates accordingly.

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The Fed aims to lower inflation by reducing spending on goods and services, particularly goods and services that are already in high demand and in short supply. As consumers and businesses cut spending, businesses may not be able to continue raising prices when demand for their products decreases.

Lower interest rates also tend to lower stock and house prices, which may prompt wealthier households to cut back on spending or increase saving to compensate.

Home sales are already down sharply in 2022 after two years of rapid growth due to rising mortgage rates. Several large retail chains also expect lower earnings as consumers spend less on products like electronics and furniture.

Even so, economists and investors are increasingly concerned that the Fed may need to deliberately trigger a recession to bring down inflation. Prices of food, energy and other essential commodities have skyrocketed in post-war Ukraine, and the Fed has little control over international supply shocks.

Ongoing COVID-19 lockdowns in China are also choking off global supply chains, deepening lags behind rising prices.

https://fox2now.com/news/national/fed-set-for-largest-rate-hike-in-decades/ The Fed hikes interest rates by 75 basis points for the first time since 1994

Nate Jones

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