United States makes biggest interest rate rise in over two decades

The US central bank has announced its biggest interest rate increase in more than two decades.

The Federal Reserve said it was lifting its benchmark interest rate by half a percentage point, to a range of 0.75% to 1% after a smaller rise in March. US inflation is currently at a 40-year high, and further hikes are expected. The push marks the latest effort to bring increasing costs being felt by households around the world under control.

“Inflation is much too high and we understand the hardship it is causing,” Federal Reserve chairman Jerome Powell said in a press conference in Washington on Wednesday. “We are moving expeditiously to bring it back down.”

By raising rates, banks will make it more expensive for people, businesses and governments to borrow. Experts have said that this move could trigger a sharp economic slowdown, especially as new challenges emerge, such as the war in Ukraine and increased covid restrictions in China.

“It’s a narrow path they have to walk,” said economist Donald Kohn, who previously served on the Fed’s rate-setting committee. “It’s going to be a very difficult task.”

Many economists say the Federal government has been slow to respond to the problem, which has been fuelled by a mix of factors, including Covid-related supply shortages, a shock to energy markets from the war in Ukraine, and in the US, massive government spending – including direct cheques to households, to support the economy after during and post covid.

“They are well behind the curve. I think most central banks are,” said Thomas Hoenig, senior fellow at George Mason University’s Mercatus Center, who spent nearly 40 years at the Fed.

“But if they try to correct that error with another error – that is to shock the economies with very large interest rate increases, I think they’ll pay a pretty big price in terms of a probable recession from that.”