June 15, 2022
… I do not expect moves of this size to be common.Federal Reserve Chairman Jerome Powell on the Fed’s decision to raise its target interest rate by 0.75% — the biggest hike in borrowing costs in nearly 30 years.
- Why It Matters: By raising borrowing costs (a rate called the "federal funds rate" that also sets borrowing rates for interest rates on mortgages, credit cards, auto loans, etc.), the Federal Reserve hopes to combat inflation, which is currently at a four-decade high.
- Why does raising rates combat inflation? There are differing opinions on whether policy makers can significantly change an inflationary environment through rate changes. One theory? Inflation is often caused when too much demand leads to higher prices — the economy "overheats." Higher borrowing costs may slow demand and gradually lead to lower prices.
- But what about "cooling" the economy too much? This is a risk. The decision to raise interest rates raises concerns about a recession — which would not necessarily be caused ONLY by higher borrowing costs, but could compound an already-struggling economy.
- In its statement announcing this decision, the Federal Reserve said that it "seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run," and that it anticipates further increases in the future.
Fed attacks inflation with its largest rate hike since 1994 (Associated Press)
by Jenna Lee,