The Federal Reserve on Wednesday announced a move it hasn’t made in decades: Raising its benchmark interest rate by three-quarters of a percentage point, effectively doubling the bank borrowing rate to 1.5%-1.75%. The last time the Fed exercised this large of a one-time hike was in 1994 in an effort to get ahead of inflation. But today, sky-high inflation is already out of the bag and the Fed is scurrying to catch up.
Wall Street expected the Fed to only raise the interest rate a half-percentage point in June until May’s inflation numbers came in last week. It showed consumer prices rose 8.6% on an annual rate, blowing past expectations and setting a new 4-decade high. Then, stocks entered a bear market Monday as investors priced in the possibility the Fed would act more hawkish with inflation and hike interest rates even more.
The benchmark interest rate, which banks charge each other for overnight lending, ripples into the consumer marketplace. When the Fed hikes the rate, it causes interest rates to go up on everything from credit card interest to home loans.
On top of hiking the rate, the Fed also began shrinking its $8.9 trillion balance sheet by letting the first Treasury security mature without reinvestment. The goal of both actions is to lower the amount of money in the economy, suppressing demand to cool down prices.
For now, Americans are still spending and traveling, even amid record-high gas prices. But fears are growing over a possible recession or stagflation, where inflation is high while economic growth slows.
