US Fed raises interest rate in bid to battle inflation

Washington, July 28: The Federal Reserve raised its benchmark interest rate by three-quarters of a percentage point on Wednesday to reach a range to 2.25% to 2.5%.

The increase is the fourth since March and brings the interest rate to its highest level since 2018.

The move comes as inflation, at 9.1%, has been increasing at its fastest rate in 41 years.

Why did the Fed raise the interest rate?

Federal Reserve Chair Jerome Powell explained the decision to hike the interest rate by saying that inflation is still "much too high." He added that a further "unusually large" increase in the rate may yet come.

The aim of the central bank is to increase the cost of borrowing, for example for a car or a mortgage on a house, so that consumers are less likely to borrow and spend. The hope is then for the economy to cool and for inflation to slow down

But with the US economy already slowing down, the interest rate hike may be increasing the risk of inducing a recession.

For President Joe Biden and his Democrat Party, the deterioration of consumer confidence could be a bad omen with the November midterms approaching. Biden's popularity has taken a hit amid general discontent raising the possibility of the Democrats losing their majority in the House and Senate.

However, some analysts predict that any recession may be relatively mild thanks to the generally good financial shape of many households and the low unemployment rate.

Global trend

Central banks' benchmark rates are the amount central banks charge commercial lenders for borrowing money. Although far lower than the rates ordinary consumers pay on loans or mortgages, they tend to have a direct influence on these.

Raising them is usually a bid to rein in inflation, by discouraging borrowing.

Most Western economies have held their borrowing rates at or near unprecedented lows ever since the so-called financial crash of 2008, at the time trying to spur spending and mild inflation of around 2%.

This trend has started reversing in the past year or so, as inflation finally gathered pace, in large part as a result of the COVID pandemic's effects on the global economy.

Central banks from the UK to Australia and India have all been all on a similar path to the US in recent months. In July, even the European Central Bank raised its interest rate, for the first time in 11 years.

Source: DW