US central bank raises interest rates for first time since 2018

The US Federal Reserve is raising interest rates for the first time since 2018 in an attempt to bring fast-rising prices under control.

The US central bank said it was lifting its benchmark rate by 0.25 percentage points and signalled plans for further rate rises in the months head.

The moves come as the economy faces new uncertainty caused by the Ukraine war and coronavirus outbreaks in China.

They are expected to have widespread global repercussions.

By raising rates, the Fed will make it more expensive for households, businesses and governments to borrow.

It is hoping that will cool demand for goods and services, helping to ease price inflation in the US, which hit a new 40-year high of 7.9% last month.

“The plan is to restore price stability while also maintaining a strong labour market,” Federal Reserve Chairman Jerome Powell said. “That is our intention and we believe we can do that but we have to restore price stability.”

“We’re not going to let high inflation become entrenched,” he said. “The costs of that would be too high.”

The bank is trying to pull off a “high-wire act” says Diane Swonk, chief economist at accounting firm Grant Thornton.

Move too slowly and inflation could become entrenched, eroding living standards over time. Move too fast and the Fed risks knocking growth in the US and abroad.

“They want to dampen down the pressures of inflation without derailing the global economy,” she says.

Fed policy shift

The plans represent a seismic shift in policy from the bank overseeing the world’s largest economy. The Fed moved cautiously to raise interest rates after the financial crisis of 2008 and slashed them again when the coronavirus pandemic hit.

Projections released after the Fed’s meeting show officials also expect the interest rate to rise to almost 2% by the end of the year – a full percentage point higher than they predicted in December.

In addition to rate rises, the Fed will also be winding down other stimulus, including massive purchases of Treasury securities and other assets that it started to stabilize markets at the beginning of the coronavirus crisis.

And while the bank has certainly raised rates before, it has not faced this kind of inflation in decades.

“It’s no longer just raising rates to accommodate stronger growth,” Ms Swonk says. “Actually chasing inflation as opposed to pre-empting inflation is a very different concept.”