Key interest rate: Largest increase since 1994 in the USA

The US Federal Reserve (Fed) raised interest rates by three-quarters of a point on Wednesday, the sharpest hike since 1994, in a bid to stave off inflation that isn’t abating.

• Also read: The Fed is poised for another rate hike, perhaps the biggest since 1994

This is the third consecutive increase in these interest rates, which now range between 1.50% and 1.75% and set the tone when lending to individuals and businesses.

The Fed said it expected further hikes in a statement released after its monetary policy committee (FOMC) meeting. Most of their leaders see rates rising to 3.25-3.50% by the end of the year.

The institution also pledged that it “remains committed to bringing inflation back to its 2% target”.

Fed Chair Jerome Powell will hold a press conference starting at 2:30 p.m. (18:30 GMT).

That sharp rate hike was put on the table just days ago, as the Fed had previously priced in a half a percentage point hike like at its early May meeting, which was already the fastest since 2000.

However, the inflation numbers for May released on Friday came as a cold shower: price increases have not slowed down as they did in April. With 8.6% over a year, it even reached a new record for 40 years.

slow growth

Federal Reserve (Fed) officials also revised upwards their inflation forecasts on Wednesday and now expect 5.2% in 2022 and 2.6% in 2023, compared to 4.3% and 2.7%, respectively, in March.

Inflation remains “high, reflecting pandemic-related supply and demand imbalances, higher energy prices and broader price pressures,” the Fed said.

The institution reminds that the Russian invasion of Ukraine and sanctions against Russia have “created additional upward pressure on inflation and are weighing on global economic activity”.

In addition, China’s anti-COVID-19 lockdowns have exacerbated supply chain problems.

All of this is slowing down the US economy.


In addition, the Fed expects weaker-than-expected economic growth in the United States of 1.7% this year, compared to 2.8% previously.

It also expects the unemployment rate to rise to 3.7% by the end of 2022 and 3.9% in 2023, having previously stood at 3.5%, February 2020 levels just before the health crisis, which is as low as hasn’t been for 50 years.

Controlling inflation without plunging the world’s largest economy into recession is proving particularly difficult.

“General economic activity has rebounded” after contracting in the first quarter, the Fed notes for now, citing “robust job gains in recent months and an unemployment rate that remains at low levels.”

Jerome Powell had assessed at the previous meeting that controlling inflation without a recession was achievable, albeit difficult.

He recently pointed out that this could be accompanied by a rise in unemployment. The country faces severe labor shortages, forcing companies to raise wages, a phenomenon that also helps fuel inflation.

The Fed is struggling all the more to control inflation as its credibility is at stake: its officials have been claiming for months that this rise in prices would be temporary and therefore only began to tighten the screws in March.

“In hindsight (…) it probably would have been better to raise rates sooner,” admitted Jerome Powell in an interview with the Wall Street Journal last month.

Joe Biden’s Secretary of Commerce and Finance, Janet Yellen, also admitted that she did not expect such a price increase.

The Fed is independent of the federal government, but Jerome Powell was recently hosted by Joe Biden at the White House along with Janet Yellen for a rare interview on inflation.

The European Central Bank (ECB) is so concerned about high global inflation and its impact on markets that it held an extraordinary meeting on Wednesday, at the end of which it pledged to take measures to calm sovereign debt. Last week it announced that it would hike interest rates in July.

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