Fed raises interest rate

May 5, 2022
U.S. dollars stacked in front of a white background.

The labor market is extremely tight and inflation is much too high … today the FOMC raised its policy interest rate by half a percentage point.

U.S. Federal Reserve Chair Jerome Powell in his speech outlining the Fed’s plan to reduce inflation, which has experienced its sharpest increase since 2000.
  • The Federal Reserve announced a jump in the short-term borrowing rate for banks — from 0.75% to 1% — in order to prevent heightened inflation and ease the economic stress put on households.
  • This is the second time this year the Fed has raised interest rates and it is likely not the last; in their statement, the Reserve Board added that they "anticipate that ongoing increases in the target range will be appropriate."
  • The Fed cited the war in Ukraine has led to "highly uncertain" implications for the economy. Regarding the supply chain, they noted that "COVID-related lockdowns in China are likely to exacerbate supply chain disruptions."
  • Economists note that some of the factors impacting inflation are outside of the Fed's control. “The Fed can’t fix supply-side challenges with higher interest rates. Fed tightening doesn’t re-open Chinese factories, increase grain shipments from Ukraine, re-position container ships to where they are needed or hire truckers to move goods," said Jim Baird, chief investment officer at Plante Moran Financial Advisors.

Why It Matters: Americans are experiencing the highest U.S. inflation in four decades. The Fed hopes to slow this sharp increase by raising borrowing costs (which has a domino effect, impacting interest rates on mortgages, credit cards, auto loans, etc.). Inflation is one sign of an economy "over-heating" — the purchasing power of your dollar decreases as prices rise (we've seen this acutely during the pandemic as demand has outpaced supply, which has created drastically rising prices). Higher borrowing costs can attempt to "cool" the economy by slowing consumer spending just enough to slow down inflation without causing a recession.

Fed raises key rate by a half-point in bid to tame inflation (Associated Press)

Here’s what the Fed’s half-point rate hike means for your money (CNBC)

by Jenna Lee,