(CNN) – The Federal Reserve on Wednesday raised interest rates by three-quarters of a percentage point in a powerful move to tackle the festering inflation that has plagued the economy, frustrated consumers and stifled the Biden administration.
It is the largest rate increase since 1994 and will affect millions of American businesses and families, raising the cost of home, car and other loans to force a slowdown in the economy.
Until this week, economists and investors had expected the Fed to raise the benchmark interest rate by half a point, the second such move in the last 22 years. However, after Friday’s disastrous inflation report revealed that price gains were widening across the economy, expectations for a further interest rate hike rose.
Americans are struggling with rising costs from the grocery store to the gas pump, and the Federal Reserve is tasked with keeping prices stable.
Rising prices from food to gasoline, which hit a string of daily record levels in the past month, have pushed consumer confidence to the lowest level since 1952.
When the pandemic first hit the United States, the Federal Reserve implemented a series of emergency measures to support the economy, including cutting the interest rate to zero, which made borrowing almost free. But while this “easy money” policy encouraged household and business spending, it fueled inflation and contributed to the warming of today’s economy.
Now that the economy no longer needs the Fed’s support, the central bank has taken steps to “eliminate the giant pot” and slow the economy by aggressively raising interest rates.
The Fed’s actions will raise the interest rates that banks charge each other on overnight loans to between 1.5% and 1.75%, the highest since before the pandemic hit the United States.
The rate hike isn’t entirely unexpected: Some major banks, including Barclays, Jefferies, Goldman Sachs and JP Morgan, had expected the Federal Reserve to raise its rate by 75 basis points, or three-quarters of a percentage point.
The central bank’s announcement came at the end of a two-day policy-making meeting.
Federal Reserve Chairman Jerome Powell acknowledged that the decision to raise interest rates by three-quarters of a percentage point was much larger than the Fed’s usual rate increases. He noted that the Fed would not get used to being so aggressive… but he did not rule on another increase of this size at its next meeting in July.
“Obviously, today’s 75 basis point increase is extraordinarily large, and I don’t expect moves of this magnitude to be common,” Powell said.
However, he added, the Fed will likely discuss whether to raise interest rates by 75 basis points or just 50 basis points when it meets late next month.
“We will make our decisions on a meeting-by-meeting basis,” Powell said, stressing once again that the Fed will remain “data-driven.”
Powell tried to reassure investors and all Americans that the central bank understood its enormous responsibility in controlling prices.
At the start of his remarks on Wednesday, Powell said the Fed “has the tools we need and the resolve it will take” to normalize high inflation.
“In the current very unusual circumstances with inflation well above our target, we believe it would be useful to provide more clarity than usual,” Powell said.
Powell noted that after the CPI showed inflation returning to a 40-year high in May, the Fed was ready to act quickly.
“The question is, what do you do? And do you wait six weeks to do that at the next meeting?” Powell said. “And I think the answer is that’s not where we are with this. So we decided we had to move on.”
This article was prepared with information from David Goldman, Paul R. La Monica, and Nicole Goodkind