The Federal Reserve on Wednesday raised its key benchmark interest rate by three-quarters of a percentage point, the largest hike in nearly three decades, in an effort to combat inflation.

What You Need To Know

  • The Federal Reserve on Wednesday raised its key benchmark interest rate by three-quarters of a percentage point in an effort to combat inflation

  • The increase is the largest such hike since 1994

  • The move will increase the Fed's benchmark short-term rate, which affects many consumer and business loans, to a range of 1.5% to 1.75%

  • Other central banks around the world are also acting swiftly to try to quell surging inflation, even with their nations at greater risk of recession than the United States

The move will increase the Fed's benchmark short-term rate, which affects many consumer and business loans, to a range of 1.5% to 1.75%.

"The economy and the country have been through a lot in the past two-and-a-half years and have proved resilient," Fed Chair Jerome Powell said. "It is essential that we bring inflation down if we are to have a sustained strong labor market conditions that benefit all."

Speaking at a news conference Wednesday, Powell suggested that another three-quarter-point hike is possible at the Fed’s next meeting in late July, if inflation pressures remain high. Asked why the Fed was announcing a more aggressive rate hike than he had earlier signaled it would, Powell replied that the latest data had shown inflation to be hotter than expected and that the public’s inflation expectations have accelerated.

“We thought strong action was warranted at this meeting,” Powell added, “and we delivered that.”

The central bank is ramping up its drive to tighten credit and slow growth with inflation having reached a four-decade high of 8.6%, spreading to more areas of the economy and showing no sign of slowing. Americans are also starting to expect high inflation to last longer than they had before. This sentiment could embed an inflationary psychology in the economy that would make it harder to bring inflation back to the Fed’s 2% target.

The Fed’s three-quarter-point rate increase exceeds the half-point hike that Powell had previously suggested was likely to be announced this week. The Fed’s decision to impose a rate hike as large as it did Wednesday was an acknowledgment that it’s struggling to curb the pace and persistence of inflation, which has been worsened by Russia’s war against Ukraine and its effects on energy prices.

Borrowing costs have already risen sharply across much of the U.S. economy in response to the Fed’s moves, with the average 30-year fixed mortgage rate topping 6%, its highest level since before the 2008 financial crisis, up from just 3% at the start of the year. The yield on the 2-year Treasury note, a benchmark for corporate borrowing, has jumped to 3.3%, its highest level since 2007.

Even if a recession can be avoided, economists say it’s almost inevitable that the Fed will have to inflict some pain — most likely in the form of higher unemployment — as the price of defeating chronically high inflation.

Inflation has shot to the top of voter concerns in the months before Congress’ midterm elections, souring the public’s view of the economy, weakening President Joe Biden’s approval ratings and raising the likelihood of Democratic losses in November. Biden has sought to show he recognizes the pain that inflation is causing American households but has struggled to find policy actions that might make a real difference. The president has stressed his belief that the power to curb inflation rests mainly with the Fed.

Yet the Fed’s rate hikes are blunt tools for trying to lower inflation while also sustaining growth. Shortages of oil, gasoline and food are propelling inflation. The Fed isn’t ideally suited to address many of the roots of inflation, which involve Russia’s invasion of Ukraine, still-clogged global supply chains, labor shortages and surging demand for services from airline tickets to restaurant meals.

Expectations for larger Fed hikes have sent a range of interest rates to their highest points in years. The yield on the 2-year Treasury note, a benchmark for corporate bonds, has reached 3.3%, its highest level since 2007. The 10-year Treasury yield, which directly affects mortgage rates, has hit 3.4%, up nearly a half-point since last week and the highest level since 2011.

Investments around the world, from bonds to bitcoin, have tumbled in recent months on fears surrounding high inflation and the prospect that the Fed’s aggressive drive to control it will cause a recession. Even if the Fed manages the delicate trick of curbing inflation without causing a recession, higher rates will nevertheless inflict pressure on stock prices. The S&P 500 has already sunk more than 20% this year, meeting the definition of a bear market.

Other central banks around the world are also acting swiftly to try to quell surging inflation, even with their nations at greater risk of recession than the United States.