The Federal Reserve has made a dramatic move to fight rising consumer prices: it hiked its benchmark interest rate by three-quarters of a percentage point. The hike is the Fed’s largest since 1994, and follows a quarter-point hike in March and a half-point increase in May. The federal funds rate, also known as the federal funds rate, determines the cost that banks charge consumers and businesses to borrow money.
The Fed has been lagging behind the curve for over a decade, and the increase was expected by economists and traders. The Fed has acknowledged that the move will cause some damage but does not foresee a recession. The central bank expects the economy to grow by 1.7% this year, with unemployment hovering at around 3.7% by the end of the year. However, it’s not clear how much of an impact the Fed’s move will have on the economy.
In 1975, the Fed Funds Rate was 3.25%. On July 15, it increased to 13.0%. On Aug. 16, it changed to 9.5%. Then on Nov. 16 and Nov. 21, it reached a record high of 5.5%. The GDP was only 4.6% in 1975, with an unemployment rate of 7.4% and inflation of 3.3%. The Fed began raising rates again after lowering them for two years.
While the Federal Reserve’s latest interest rate hike reflects the fact that the economy is facing inflation that is much higher than many economists expected (the highest since the early ’80s), Powell is also acknowledging that there are mistakes being made by the Federal Reserve. The Fed is expected to raise rates by three-quarters of a percentage point again in December, and a quarter-point hike might be appropriate. The Fed is expected to continue raising rates this year, and this hike is a necessary part of that process to tame inflation.