The Federal Reserve raised its baseline interest rate range Wednesday by two times the size of a usual rate hike as the central bank sprints to get ahead of rising inflation.
The Federal Open Market Committee (FOMC), the panel of Fed officials in charge of monetary policy, boosted interest rates by 0.5 percentage points to a target range of 0.75 to 1 percent. The bank has not raised interest rates by more than 0.25 percentage points at a single FOMC meeting since May 2000.
After leaving rates near zero for all of 2021, Fed Chairman Jerome Powell and other bank leaders have pledged to quickly bring borrowing costs back toward levels that won’t stimulate the economy.
Top Fed officials all but confirmed they would hike rates by 0.5 percentage points in the weeks leading up to the May FOMC meeting after approving a 0.25 percentage point hike in March. All 10 voting member of the FOMC supported the decision.
Consumer prices rose 6.6 percent over the 12 months ending in March, according to personal consumption expenditures price index, the Fed’s preferred gauge of inflation. The Fed aims for annual inflation of 2 percent each year.
“Inflation is much too high and we understand the hardship it is causing. And we’re moving expeditiously to bring it back down,” Powell said during a Wednesday press conference.
“We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses.”
Interest rates for mortgages, automobile loans and other longer-terms loans were already rising in anticipation of the Fed’s decision. Rates on credit cards, short-term credit products and loans with adjustable interest rates — which lenders often tie to the Fed’s baseline interest rate range — are set to rise immediately.
Fed officials are hoping to bring inflation down by reducing consumer and business spending through higher interest rates. As households and businesses face higher borrowing costs, they could be less willing to spend money on goods and services. Lower demand for goods and services could prompt suppliers to reduce prices and curb plans to spend money on expanding their operations.
While Fed officials are aiming to slow the economy enough to reduce inflation without stopping growth altogether, a growing number of economists fear the bank may be unable to stop prices from rising without causing a recession.
When the Fed raises interest rates quickly to stop rising inflation, the steep rise in borrowing costs can slow the economy into a recession and an increase in unemployment.
Powell and Fed officials have expressed confidence the U.S. economy is strong enough to withstand higher interest rates without a stoppage in growth or joblessness rising.
The U.S. added 1.7 million jobs over the first three months of 2022 and had 11.5 million open jobs in March, according to the Labor Department, a figure that amounted to roughly two open positions for every unemployed American.
Even so, stubborn pandemic-related supply chain snarls, port backlogs, the war in Ukraine and slowing economic growth abroad may make it tougher for the Fed to curb inflation without adverse effects for the U.S. economy.
“The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is creating additional upward pressure on inflation. And COVID related lockdowns in China are likely to further exacerbates supply chain disruptions as well,” Powell said.
The Fed also announced plans to reduce the nearly $9 trillion in Treasury bond and mortgage-backed securities it holds on its balance sheet. The bank began purchasing billions of dollars in bonds each month since March 2020 to help keep money flowing through the financial system and stimulate the U.S. economy and halted those purchases last month.
The Fed will allow $30 billion in Treasury bonds and $17.5 billion in mortgage bonds to “run off” its balance sheet each month from June through August. The bank will not sell those bonds, but instead will not replace them after they mature. The Fed will increase those caps to $60 billion for Treasuries and $35 billion for mortgage bonds in September.
Updated at 2:35 p.m.