The US central bank has increased interest rates again in an effort to combat inflation, and they are currently at their highest levels since the global financial crisis.
The Federal Reserve, or Fed, increased interest rates by 0.50 percentage points.
The widely anticipated increase would result in higher borrowing costs for groups including American homeowners and people who are paying off credit card debt.
US interest rates now range from 4.25% to 4.5%, up from 3.75% to 4% since the previous increase in November.
Because the Fed is not allowed to set a specific number, the interest rate in the US is a range rather than a single percentage, as it is in the UK. Instead, a target rate is established as a direction for banks to take.
The rise is lower than the 0.75 percentage point increases made four times prior, which shows the Fed is easing up in its fight against inflation.
To reduce inflation to its target of 2%, it has started a campaign of interest rate increases.
As inflation appears to be reducing in the biggest economy in the world, the rate of rate increases has slowed. The US Department of Labor said on Tuesday that prices rose 7.1% in the year to November, down from a 40-year high of 9.1% in June.
The Fed was adamant that it was continuing with its campaign of rate rises after unveiling the most recent one.
Jerome Powell, the chairman of the Fed, said that he anticipated continued rises and a sustained period in which the interest rate is kept high.
He predicted that rates would be 0.5% higher than expected in September by the end of the year as a result of the ongoing strong inflation.
He cautioned that it will take time for increased interest rates to have an impact on inflation, adding: “The most interest-sensitive economic sectors, like housing, are showing the consequences on demand. The full impact of monetary restriction, particularly on inflation, won’t be felt right away.”
He recognised that the US economy had “slowed dramatically” despite this.
He predicted that the GDP, a measure of economic production, will expand by just 0.5% this year and the following year.
However, the US labour market is still “very tight,” with the unemployment rate close to a 50-year low, the number of open positions “still quite high,” and substantial wage growth.
Mr. Powell understood the suffering that inflation was causing American families. But according to him, it won’t drop to the 2% target for another two years.
According to the Fed’s prediction, inflation will be 5.6% this year, 3.1% the following year, 2.5% in 2024, and then 2.1% in 2025.
“We are aware of how our activities impact businesses, families, and communities all around the nation. Every action we take serves our public mission,” he said.
The Bank of England made a similar announcement regarding interest rates on Thursday, raising base rate 0.5% to 3.5%. Once again, the hike is designed to raise the cost of borrowing in an effort to slow down the economy and control inflation.
