The Federal Reserve has raised interest rates by 75 basis points, the single largest increase in nearly thirty years as inflation soars.
The hike to the federal funds rate – the benchmark interest rate at which banks borrow and lend money to each other overnight, affecting money supply in the economy – was announced Wednesday, after a meeting of the Federal Open Market Committee led by Chairman Jerome Powell. In the short-term, the Federal Reserve said that it would intend to bring the rate to a range of 1.5 percent to 1.75 percent.
Of the eight-member committee, seven voted in favor of the hike while one member, Esther George, President of the Federal Reserve Bank of Kansas City, voted against the increase, preferring that it be 0.5 percent instead.
The hike is the largest since 1994, when then-Chairman Alan Greenspan led a similar increase in anticipation of high inflation during an economic recovery. Wednesday’s move has considerable implications on individual borrowing in the economy and will likely lead to higher interest rates on loans for consumers and businesses.
The move comes as inflation has reached its highest level since 1982, currently at 8.6 percent per the latest federal Consumer Price Index report. It’s a figure for which the Biden Administration has received considerable criticism, with its policy actions – i.e., the nearly $2 Trillion American Rescue Plan’s Covid relief spending and ongoing efforts to transition U.S. energy supply away from fossil fuels – being directly cited as exerting demand-pull effects on consumer prices.
Additionally, the Administration’s difficulties in resolving supply-chain problems, such as the ongoing shortage of semi-conductor microchips in electronic products, as well as the port blockages (e.g., at the Port of Los Angeles, through which flows 37 percent of U.S. imports), have been identified by critics as leading to a scarcity of goods and, thus, inflation. Most recently, a shortage of baby formula across the country prompted public outcry that led the Administration to intervene.
Previously, Powell – who was recently sworn into a second term after Biden re-nominated him to the chairman’s post – had said that the Federal Reserve would do “whatever it takes” to curb inflation, with the bank signaling that more rate hikes were to come.