The US Federal Reserve raised interest rates by 0.75 percentage points, their highest level since 2008.
The move, the third rise in a row and the quickest and most aggressive rate of increase since the 1980s clearly signalled its determination to stamp out inflation.
Some economists believe the increase should have been higher – a full percentage point.
The move boosted its benchmark rate, which affects most consumer and business loans, to 3-3.25 per cent.
US Fed Chair Jerome Powell said before his officials would consider halting the rate hikes, they would “want to be very confident that inflation is moving back down” to the 2 per cent target. The strength of the US job market is fueling pay gains that are helping drive up inflation he said.
He stressed his belief that curbing inflation is essential to ensuring the long-term health of the job market. “If we want to light the way to another period of a very strong labor market,” Powell said, “we have got to get inflation behind us. I wish there was painless way to do that. There isn’t.”
The decision increases pressure on the UK to raise interest rates. The Bank of England monetary policy committee (MPC) will announce at noon today its own interest rate decision. Experts are divided over whether to expect an increase of 50 or 75 basis points.
The pound hit a fresh 37-year low against the dollar last week amid fears for the health of the UK economy.
Markets fear inflation could grow further beyond its current record highs in light of the announcement of fresh energy cost measures by the Government.
The additional government support could result in higher medium-term inflation, economists warned, while the UK economy can only manage sluggish growth and tight labour markets.
Led by the US Fed’s intensifying focus on fighting inflation, the global increases in the cost of borrowing have become so pronounced some fear it will bring on a recession.
“Central banks nearly everywhere feel accused of being on the back foot” in failing to prevent the jump of inflation in 2021, Maurice Obstfeld, former chief economist of the International Monetary Fund, wrote.
The US Federal Open Market Committee, the rate-setting committee, unanimously voted to increase borrowing rates, stressing it remains “highly attentive to inflation risks”.
In a statement, the US central bank stressed it is “strongly committed to returning inflation to its 2 per cent objective”.
The central bank signalled additional large increases were likely at the next meeting as it fights inflation at a 40-year high. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices,” it added.
On Wall Street, share prices fell and bond yields rose in response to the Fed’s projection of further rate rises.