US Fed Finally Hikes by 0.75%P... Year-End Interest Rate Expected at 3.4% (Update 2)

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), has implemented a so-called 'Giant Step' by raising the benchmark interest rate by 0.75 percentage points at once. This is the largest increase since 1994, a strong measure to curb soaring inflation.

On the 15th (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that the federal funds rate would be raised by 0.75 percentage points from the previous 0.75?1.00% to 1.50?1.75%. As a result, U.S. interest rates have risen to their highest level since just after the COVID-19 pandemic began in March 2020.

The FOMC stated, "Overall economic activity appears to have declined slightly in the first quarter but has since recovered," while also noting that "inflation remains elevated due to supply and demand imbalances related to the pandemic, high energy prices, and broad price pressures."

The released dot plot showed the benchmark interest rate at the end of this year at 3.4%, which is an upward revision of 1.5 percentage points from the March estimate.

This is the first time in 27 years and 7 months since November 1994, during former Chairman Alan Greenspan's tenure, that the Fed has raised rates by 0.75 percentage points at once. This Giant Step is interpreted as a judgment that an extreme remedy is necessary as U.S. inflation, at its highest level in about 41 years, is not easing.

Earlier, Fed Chair Jerome Powell had drawn a line against a Giant Step during a press conference after the FOMC last month, forecasting a Big Step (0.5 percentage point increase) in June and July. However, with the recently released U.S. May Consumer Price Index (CPI) recording the largest increase since 1981 (8.6%) and the expected inflation over the next year reaching a record high of 6.6%, the sentiment spread that a Big Step would not be sufficient. Ultimately, this dramatic hike is seen as a firm demonstration of the Fed's determination to stabilize inflation by any means necessary.

In the economic outlook released on the same day, the forecast for this year's U.S. personal consumption expenditures (PCE) growth rate was revised upward from 4.3% to 5.2%. The forecast for core inflation, excluding energy and food, was raised by 0.2 percentage points to 4.3%. Along with this, the Fed lowered its forecast for the U.S. real gross domestic product (GDP) growth rate this year from the baseline 2.8% to 1.7%.

The market is now awaiting the upcoming press conference by Fed Chair Jerome Powell.

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