By Alice Seeley
On May 4, the Federal Reserve increased its interest rate by a half-percentage point to combat the highest inflation in forty years. This is the largest increase in more than two decades.
The interest rate is now in a range of 0.75 and 1%, with the central bank projecting a total of about six additional hikes by the end of the year. The rate is expected to rise to between 3% and 3.25% by the end of 2022.
The Fed hopes the rate hike will slow down demand from consumers and businesses for goods and services. The increased rate will make it more expensive for consumers to borrow money for a house, car, or other major purchases, which will prompt consumers not to make these purchases. The Federal Reserve believes a drop in demand will help decrease inflation, which reached a record high of 8.5% in March, the highest increase since 1981.
In addition to the increased interest rate, the Fed is also withdrawing other liquidity from the financial system that has helped keep interest rates super low for more than a decade. This act makes it more expensive to borrow or run a balance on a credit card.
Jerome Powell, the Chair of the Federal Reserve, acknowledged the record-high inflation during a press conference on Wednesday.
“Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses,” said Powell.
Also, at the conference, Powell mentioned that the Federal Reserve might continue to approve increases of as large as half a percentage point. However, he reassured the press that an increase of more than 0.75 percentage points was “not something the committee is actively considering.”