[FOMC] Fed Finally Takes 'Giant Step' After 28 Years... Raises Rate to 3.4% by Year-End

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. Federal Reserve (Fed), struggling with soaring inflation, took a 'giant step' by raising the benchmark interest rate by 0.75 percentage points at once for the first time in 28 years. As a result, the benchmark interest rates of South Korea and the U.S. both stand at 1.75%. The Fed projected the year-end benchmark interest rate at 3.4%. The rapid rate hike in the U.S. is expected to send shockwaves through the global economy, including capital outflows from emerging markets and asset market collapses.

On the 15th (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would raise the federal funds rate from the previous 0.75?1.00% to 1.50?1.75%. The giant step of raising the rate by 0.75% is the first since November 1994 during former Chairman Alan Greenspan's tenure.

This move is interpreted as a judgment that a drastic measure is necessary as U.S. inflation, at its highest level in about 41 years, shows little sign of easing. Fed Chair Jerome Powell said at a press conference immediately afterward, "Inflation has risen surprisingly after the May FOMC," adding, "It will be appropriate to continue raising rates."

He did not rule out the possibility of another giant step in July. Powell said, "The most likely increase at the next meeting is either 0.5 percentage points or 0.75 percentage points." However, he added a caveat, saying, "A 0.75 percentage point increase is an uncommon strong measure." Ultimately, as with this month's FOMC, the final rate hike will likely be determined by the inflation data released just before the meeting.

On the same day, the Fed presented a dot plot showing its future rate outlook, projecting the year-end rate at 3.4%. This is 1.5 percentage points higher than the forecast of 1.9% made just three months ago in March. This also implies a total increase of 1.75 percentage points over the remaining four FOMC meetings this year. To achieve this, additional giant steps or consecutive big steps (0.5 percentage point increases) are essential.

Along with this, the Fed lowered its U.S. economic growth forecast for this year from 2.8% to 1.7%. Reflecting inflation concerns, the inflation rate forecast for this year was raised from 4.3% to 5.2%.

However, some voices have raised concerns about a recession due to the ultra-fast rate hikes. In response, Chair Powell said, "We are committed to bringing inflation back to the 2% target and will respond flexibly depending on the situation," adding, "Although we have faced significant challenges in recent months, I believe a 'soft landing' of the economy is possible." He pointed out that recent U.S. consumer spending remains strong and stated, "There are currently no signs of an impending recession."

On the day, the New York stock market rallied with relief and closed higher across the board. This was because some uncertainty surrounding monetary tightening was resolved, and the giant step confirmed the Fed's strong commitment to price stability. Charlie Ripley, Vice President of Allianz Investment Management, said, "Despite the potential repercussions of rapid rate hikes, the Fed reaffirmed its commitment to fight inflation more aggressively," adding, "These aggressive hikes will soothe the market for the time being."

This content was produced with the assistance of AI translation services.