US Federal Reserve hikes rates by 75 bps, biggest jump since 1994, flags slowing economy

By Team Newsable | First Published Jun 16, 2022, 9:11 AM IST

While announcing the rate hike, the Fed stated that it is "deeply committed" to returning inflation to 2%. It predicted a weakening of the country's economy in the next months, as well as a rise in the jobless rate. The 75 basis point increase in the benchmark lending rate is the largest since 1994, and comes after recent statistics indicated little headway in the country's inflation fight.

The US Federal Reserve raised its target interest rate by three-quarters of a percentage point, or 75 basis points, on June 15, in what is considered as an effort to rein in spiralling inflation. While announcing the rate hike, the Fed stated that it is "deeply committed" to returning inflation to 2%. It predicted a weakening of the country's economy in the next months, as well as a rise in the jobless rate.

The 75 basis point increase in the benchmark lending rate is the largest since 1994, and comes after recent statistics indicated little headway in the country's inflation fight.

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The Fed policymakers also hinted at a sharper path of borrowing rate rises in the future, more closely aligning monetary policy with a sharp shift in financial market estimates of what it will take to keep price pressures under control this week.

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"Inflation is elevated, reflecting supply and demand imbalances associated to the pandemic, increased energy costs, and broader pricing pressures," the Federal Open Market Committee said in a statement following its last two-day meeting in Washington.

The statement went on to blame inflation on the Ukraine war and China's lockdown policies.

The decision boosted the short-term federal funds rate to a range of 1.50 per cent to 1.75 per cent, and Fed policymakers saw the rate climbing to 3.4 per cent by the end of this year and 3.8 per cent in 2023, a significant departure from March predictions of the rate rising to 1.9 per cent this year.

Since March, when Fed officials predicted they could raise rates and keep inflation under control while keeping the unemployment rate at 3.5 percent, inflation has persistently lingered at a 40-year high, with little sign of hitting the peak Fed policymakers planned for this spring.

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Inflation has become the Fed's most important economic concern, and it has begun to affect the political landscape as well, with public morale deteriorating as food and fuel costs rise.

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