For the second consecutive time, the U.S. Federal Reserve has raised its trendsetting interest
rate by 0.75 percentage point to cool down overheated inflation.
America’s central bank lifted its borrowing rate to a range of 2.25% to 2.50%, its highest level
since December 2018. The rate hike was approved unanimously.
The back-to-back increases in June and July represent the most aggressive action by the
Federal Reserve since it began using the overnight federal funds rate as its main tool for
monetary policy in the 1990s.
Stock markets largely expected the move after Federal Reserve officials telegraphed the
increase in a series of statements in recent weeks. Stocks rallied after Federal Reserve
Chairman Jerome Powell left the door open about the central bank’s next move in September,
saying it would depend on the data.
“As the stance of monetary policy tightens further, it likely will become appropriate to slow the
pace of increases while we assess how our cumulative policy adjustments are affecting the
economy and inflation,” Powell said.
The Fed Chair added that he does not think the U.S. economy is in a recession, though growth
was negative in the first quarter and was expected to be barely positive in the second quarter.
The latest interest rate increase comes as inflation in America sits at 9.1%, its highest level
since 1981. Like most central banks, the Federal Reserve targets inflation at 2%.
Powell said the Fed is “strongly committed” to reducing inflation and said that could come with a
cost to economic growth and the labour market.
“We think it is necessary to have growth slow down. Growth is going to be slowing down this
year for a couple of reasons,” he said. “We actually think we need a period of growth below
potential in order to create some slack.”
First-quarter gross domestic product (GDP) in the U.S. declined by 1.6%, and markets are
bracing for a reading on second quarter GDP to be released later today (July 28) that could
show consecutive quarterly declines, which would put the American economy into a technical
recession.
