The US Federal Reserve surprised the market. Instead of the expected rise in the key interest rate by half a percentage point, it raised it by 0.75 percentage point. This is the largest increase in the Federal Reserve rate in 28 years.
Setting of monetary policy instruments
The Free Market Operations Committee (FOMC), which decides on the setting of monetary policy instruments within the Federal Reserve, has decided to react vigorously to accelerating inflation. In the US, it rose to 8.6 percent year on year in May. “Inflation remains high and reflects supply and demand imbalances linked to the coronavirus pandemic, high energy prices and other price pressures,” the FOMC said in a press release after two days of talks.
Fed is increasing base rate
The Committee has made clear its intention to reduce inflation to the 2% target as soon as possible. Fed Governor Jerome Powell told a news briefing that a 0.75 percentage point rate hike was right. “That’s why we did it,” he added. According to him, another increase will follow in July. By the end of the year, the Fed’s base rate could rise to 3.4 percent from the current range of 1.5 to 1.75 percent. According to the Fed, it is also necessary to expect a slowdown in economic growth and rising unemployment.
