US Federal Reserve hikes interest rates by 75 basis points to fight surging inflation

The Federal Reserve of the United States hiked key interest rates by 75 basis points or three-quarters of a percentage point on Wednesday in line with investors’ expectations to fight surging inflation.

The Federal Reserve’s policy rate, which affects other borrowing costs and slows growth, is presently set at a range of 3% to 3.25%, a level last seen in early 2008. The central bank has lifted its benchmark rate four times this year from nearly zero to about 2.375%. 

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The Fed signaled additional large increases were likely at upcoming meetings at its fights combats inflation that remains near a 40-year high. The decision was unanimously supported by the Fed’s 12-member rate-setting committee.

The GDP growth forecast has been marked down to 1.2% in 2023 and 1.7% in 2024, below the longer-run trend. Unemployment is seen rising to 4.4% in 2023.

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Economists have been ratcheting their forecasts for how high they expect the Fed to take the funds target before stopping the hikes.

The major indexes gave up their gains and traded lower
after the Federal Reserve announced its 0.75 percentage point rate hike. The
Dow Jones Industrial Average slipped about 240 points shortly after 2 pm Eastern
Time. The S&P 500 dropped 0.8%, and the Nasdaq Composite lost 1%.

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After a surprisingly hot August consumer price index report, expectations for Fed tightening had increased dramatically in the past week. The consumer price index surged 0.1% in August, while economists had expected a fall.

The CPI, which tracks goods and services, rose 0.1% for the month and 8.3% over the past year. Excluding volatile food and energy costs, CPI increased 0.6% in July and 6.3% in the same month in 2021.