US in biggest rate hike since 1994
As Fed tries to tame runaway inflation, will the Bank of England now follow suit?
AMERICA’S central bank has pressed ahead with its biggest interest rate hike since 1994, as it battles red-hot inflation.
The Federal reserve bumped up its base rate by 0.75 percentage points last night, to the range of 1.5pc to 1.75pc, warning that the cost-of-living crisis is still ravaging the economy.
inflation in the US hit 8.6pc last month, the highest in 40 years.
And while officials were worried that hiking interest rates too fast could throw the Covid recovery into reverse, the Fed seems to be more concerned about the squeeze higher prices applies to households and businesses.
The Fed’s rate-setting Open market Committee said: ‘Overall economic activity appears to have picked up after edging down in the first quarter.
‘Job gains have been robust in recent months, and the unemployment rate has remained low.
‘ inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.’
The 0.75 percentage point hike is a momentous move – the central bank usually prefers a more gradual 0.25 percentage points.
it is a sign of just how worried policy makers are about rising prices. The Fed also dramatically raised its forecasts for future interest rates, projecting its key rate could hit 3.8pc by 2024.
Jerome Powell, Fed chairman, said: ‘ We understand the hardship high inflation is causing.
‘We’re strongly committed to bringing inflation back down and we are moving expeditiously to do so. We have the tools we need and the resolve that it will take to restore price stability on behalf of families and businesses.’
richard Carter, of investment firm Quilter Cheviot, said: ‘Choosing to raise interest rates by 0.75 percentage points looks justified given the unrelenting inflation pressures being seen in the US.
There is no doubt that the Fed got themselves behind the curve on inflation and are now having to make up for lost time.
‘inflation has been stickier and more persistent than was expected, so it is unlikely now that this problem will simply just dissipate quickly.’
He noted that there was no sign of the oil price slipping significantly, and said it could rise further when China ‘switches back on following various lockdowns’.
The Fed’s move piles pressure on the Bank of england, which is due to announce its latest interest rate decision today.
rates in the UK are 1pc, and traders are divided over whether the Bank will opt for a 0.25 or 0.5 percentage point rise.
Britain’s central bank is walking a finer line than its US counterpart. inflation is also at a 40-year high, but cracks are showing in the economy. Activity contracted for the second month in a row in April, and there were signs that the jobs market was weakening.
This means the Bank has less confidence that it can hike interest rates fiercely. Though this could tame inflation, it will also put a dampener on growth.
But rising rates in the US are pushing up the value of the dollar, at the expense of sterling, as investors flock to a currency which is yielding higher returns.
The pound is down 10pc against the dollar this year. A fall in sterling makes inflation in the UK even worse, as importers find their pounds don’t stretch as far when buying goods like oil.
Laith Khalaf, head of investment analysis at AJ Bell, said that there would be ‘ further thrills and spills in markets’ as investors ‘digest the end of the era of cheap money’.