US Fed raises interest rates by 75 basis points to tame inflation

In the backdrop of an over four-decade high inflation, the US Federal Open Market Committee has raised its key policy interest rate by 75 basis points to 2.25-2.50 per cent, anticipating that the increase in the interest rates will be “appropriate”.

IMAGE: US Federal Reserve Chairman Jerome Powell. Photograph: Tom Williams/Reuters

Hiking interest rates typically cool demand in the economy, thereby putting a brake on the inflation rate.

The US Federal Reserve in its June meeting too raised the interest rate by 75 basis points, which was the steepest hike since 1994.

“My colleagues and I are strongly committed to bringing inflation back down, and we are moving expeditiously to do so.

“We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses,” US Federal Reserve Chair Jerome Powell said in his opening remarks after the monetary policy meeting.

The inflation rate in the US came in at 9.1 per cent in June, the highest since the early 1980s. Inflation approaching double-digits has prompted the US central bank to take a tougher stance.

“It is essential that we bring inflation down to our 2 per cent goal if we are to have a sustained period of strong labour market conditions that benefit all,” Powell said.

In addition, the US Fed is continuing the process of significantly reducing the size of the balance sheet.

“And after a strong increase in the first quarter, business fixed investment also looks to have declined in the second quarter.

“Despite these developments, the labour market has remained extremely tight, with the unemployment rate near a 50-year low, job vacancies near historical highs, and wage growth elevated,” Powell said.

The US Fed’s monetary policy actions are guided by the mandate to promote maximum employment and stable prices for the American people, Powell further said in his remarks.

“We are highly attentive to the risks high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 per cent objective.”

Further, he said that another “unusually large increase” in rates could be appropriate at our next meeting, that is a decision that will depend on the data the US Fed gets between now and then.

“We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible.”