The Federal Reserve raised interest rates by three-quarters of a percentage point Wednesday, the highest increase in nearly three decades, as the central bank scrambles to tame inflation.
After days of speculation, the Federal Open Market Committee lifted benchmark borrowing rates to a range of 1.5% to 1.75% and signaled future increases.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the committee said. “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”
The statement said, “In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The committee is highly attentive to inflation risks.”
The Fed signaled the rate will end the year at 3.4%, or up 1.5 percentage points from a March estimate.
The series of increases will circulate through the economy, impacting everything from credit-card borrowing to home-equity loans — and raise fears of a recession.
Stocks gave up some of their gains immediately after the Fed’s announcement.
The Fed had been expected to increase rates by 50 basis points, but landed on 75 basis points after a Friday report showed inflation was not abating and had reached another 40-year high in May.
The soaring cost of gas, food and other goods is a major drag on American families. Addressing it is a delicate dance for the Fed, which would like to give the economy a so-called soft landing that tames inflation without tipping it into a recession.
But surveys suggest Americans expect inflation to persist, so they might make larger purchases before prices rise — fueling inflation in the process.
Some economists believe a soft landing is no longer possible and the Fed must act aggressively to reel in consumer spending and business activity.
Countries around the globe are struggling with similar trends, and the World Bank recently warned of stagflation — a combination of stagnant growth and inflation.
President Biden, who is suffering politically from high prices at home, insists the U.S. economy will flourish if supply chains can improve in the coming months. Right now, pandemic-addled supply chains are trying to catch up with consumer demand.
The president frequently blames Russian President Vladimir Putin’s invasion of Ukraine for sparking oil and food shortages and increasing prices.
Mr. Biden is reportedly weighing whether to roll back some of the tariffs his predecessor slapped on Chinese goods in a bid to ease inflation by a modest amount. He also pressed oil companies Wednesday to produce more gasoline, saying refinery profits are “well above normal” and “not acceptable” as Americans pay an average of $5 per gallon.
GOP lawmakers say Mr. Biden failed to tap into U.S. energy sources ahead of the Russian invasion and that Democrats’ $1.9 trillion virus-relief package in early 2021 over-heated the economy, worsening underlying problems.
“Inflation skyrocketed after President Biden’s ‘COVID stimulus’ forced small business owners to raise prices as government spending increased their costs, a worker shortage left them desperate for workers, and looming tax hikes threatened their futures,” the office of Rep. Kevin Brady, Texas Republican and ranking member of the House Ways and Means Committee, said in a news release Wednesday.