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US central bank hikes interest rate by biggest amount since 1994

US central bank hikes interest rate by biggest amount since 1994

US central bank hikes interest rate by biggest amount since 1994

The Federal Reserve has raised its benchmark interest rate by 75 basis points to a range of up to 1.75 per cent, its most aggressive hike in almost 27 years, as the US central bank scrambles to rein in runaway inflation.

The bank’s rate, known as the federal funds rate, impacts the rates that borrowers and savers get from banks, most notably variable rate mortgages.

The bank had been expected to raise its rate by half a percentage point, but those expectations were ratcheted up in recent days as data showed the US inflation rate has yet to peak, touching 8.6 per cent in the year up to May.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the bank said in explaining its decision.

Canada’s inflation rate likely to rise

Central banks cut their rates when they want to stimulate the economy by encouraging people and businesses to borrow and invest. And they raise their rates when they want to make borrowing more expensive, to try to cool down an overheated economy.

That’s an apt description of economies around the world right now, as the cost of living is going up at its fastest pace in decades.

Canada’s inflation rate is at a 31-year-high of 6.8 per cent and is expected to increase when the latest numbers come out next week.

The Bank of Canada has raised its interest rate three times already this year, from 0.25 per cent at the start of the year to 1.5 per cent now, in an attempt to cool things down.

The US central bank hasn’t hiked its rate by 75 basis points since 1994.

At that time, it was in the midst of seven hikes over a stretch of barely over a year, as the Federal Reserve at the time took its rate from three per cent to six per cent in an attempt to head off high inflation.

More super-sized rate hikes expected

Borrowing costs have already risen sharply even ahead of the latest Fed move.

The average 30-year fixed mortgage rate topped six per cent this week, its highest level since before the 2008 financial crisis. That’s double what the rate was as recently as February.

The value of all types of investments, from housing to stocks to bitcoin, have plunged in recent months as investors face the reality of high inflation and reduced purchasing power.

Even despite the almost unexpected 75-point hike, markets are expecting more super-sized rate hikes to come this year, because of how big a problem inflation is turning out to be.

“The prospects have have have dimmed in terms of getting inflation under control in short order,” said Michael Gregory, deputy chief economist at Bank of Montreal, in an interview with CBC News.

“The Fed has basically upped the … ante, and now we’re going to get to above three per cent by the end of this year.”

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