Fed goes bold with big rate hike

The US Federal Reserve made a dramatic move in raising interest rates Wednesday, but future inflation and economic data will tell if it will be enough to cool off prices.

Faced with runaway inflation, the Fed rolled out its biggest interest-rate hike since 1994.

The central bank raised its target interest rate three-quarters of a percentage point, or 75 basis points, to a range of 1.50 percent to 1.75 percent. Fed officials projected the rate would increase to 3.4 percent by year-end and to 3.8 percent in 2023.

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures," the central bank's policy-setting Federal Open Market Committee (FOMC) said in a statement at the end of the two-day meeting in Washington. "The committee is strongly committed to returning inflation to its 2 percent objective."

The last three consumer price index reports have come in above 8 percent, the latest at 8.6 percent in May.

"Seventy-five basis points seemed like the right thing to do at this meeting, and that's what we did," Fed Chair Jerome Powell said at a news conference after the decision.

Powell also said that an increase of either three-quarters of a point or a half-point would "most likely" be the outcome of the next FOMC meeting in late July.

But Powell said he did not expect increases of the size of Wednesday's 75-basis-point hike to "be common".

US stocks rallied Wednesday after the Fed move and Powell's assertion that 75-basis-point increases wouldn't be the norm.

The Fed also downgraded its outlook, with the economy now seen slowing to a 1.7 percent rate of growth this year, with unemployment rising to 3.7 percent by the end of this year and continuing to rise to 4.1 percent through 2024.

"The Fed is willing to let the unemployment rate rise and risk a recession as collateral damage to get inflation back down. This isn't a Volcker moment for Powell given the magnitude of the hike, but he is like a Mini-Me version of Volcker with this move," said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

He was referring to 1980s-era Fed chairman Paul Volcker, who boosted rates to 20 percent to get inflation under control.

"It's going to be a far bumpier ride to get inflation down than what they had anticipated previously," said Matthew Luzzetti, chief US economist at Deutsche Bank.

In an editorial Wednesday, The Wall Street Journal wrote: "The economic point is that policymakers should be pursuing pro-growth fiscal, deregulatory and trade policies to offset the impact of tighter money. That was the Ronald Reagan-Paul Volcker formula that broke inflation in the 1980s and led to a boom.

"We realize that the White House isn't likely to take this advice. Even as growth slows and markets slide, Mr. Biden spent Tuesday shouting to the AFL-CIO that more government spending and higher taxes on the wealthy are the cure for inflation."

Heather Boushey, of President Joe Biden's Council of Economic Advisers, told bloomberg.com: "We knew it would be a sprint to get out of this pandemic recession; we needed to pull everything out really quickly. Now we need to level off into that sort of more marathon pace."

The rising cost of gasoline and food is on the minds of many Americans.

"Rising prices are already primed to be this year's top election issue," bloomberg.com stated. It listed the "pandemic supply-chain crunch and massive fiscal stimulus" along with the "energy shock" after Russia's military operation in Ukraine, adding that "inflation has reached levels that most Americans haven't seen in their lifetimes".

Agencies contributed to this story.