The Federal Open Market Committee (FOMC) unanimously resolved to increase the federal funds rate target to the range of 3.00% – 3.25%.
This decision was taken after the federal reserve raised interest rates by 75 basis points on June 15, the steepest increase in 28 years, and by another 75 basis points on July 27. The FOMC stated that it “anticipates that continuing increases in the target range will be appropriate” despite the Fed having already increased rates by a total of 300 basis points, or 3%, since March.
Up until recently, such an increase would have been seen as extremely huge. However, the Fed has been rushing to raise rates over the “neutral” level of around 2.5%, where they neither stimulate nor impede the economy and into “restrictive territory,” where they reduce consumer demand. Market players anticipate that the Fed’s benchmark interest rate, which is currently between 3.00% and 3.25%, will reach 4.00% by the end of the year – well into what is deemed restrictive.
The sudden rate increases also reflect mistakes made by central bank officials in recognizing the danger inflation presented to the economy. When it came to hiking interest rates last year, federal reserve chairman Jerome Powell and other top Fed officials stated that they thought the gradual increase in inflation into 2021 would be only transitory. Policymakers have struggled to catch up with inflation that quickly accelerated beyond their control ever since it became evident they were mistaken.
In an effort to offset the inflationary pressures brought on by the revival of pre-pandemic activity, at least seven additional central banks are set to raise borrowing rates this week. On September 20, 2022, the Swedish Riksbank increased interest rates by one full point and indicated that more increases would follow soon after.