United States interest rates hit highest since 2000

The United States Federal Reserve (Fed) has raised its interest rate by 50 basis points — the biggest hike since 2000 — in an effort to curb rising inflation.

The bank’s federal open market committee (FOMC) unanimously voted to increase the benchmark rate by a half percentage point on Wednesday.

It also announced that it would begin allowing its holdings of treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of $47.5 billion, stepping up over three months to $95 billion.

In a statement, the Fed said although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong, adding that job gains have been robust in recent months, and the unemployment rate has declined substantially.

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But inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

The Fed also said the invasion of Ukraine by Russia is causing tremendous human and economic hardship in the country, noting that the implications for the U.S. economy are highly uncertain.

“The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The committee is highly attentive to inflation risks,” it said.

“The committee seeks to achieve maximum employment and inflation at the rate of two per cent over the longer run. With appropriate firming in the stance of monetary policy, the committee expects inflation to return to its two per cent objective and the labour market to remain strong.

“In support of these goals, the committee decided to raise the target range for the federal funds rate to 3/4 to 1 per cent and anticipates that ongoing increases in the target range will be appropriate.

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“In addition, the committee decided to begin reducing its holdings of treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in conjunction with this statement.

“In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook. The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals.

“The committee’s assessments will take into account a wide range of information, including readings on public health, labour market conditions, inflation pressures and inflation expectations, and financial and international developments.