Mercatus Center

The US Central Bank has announced its biggest interest rate increase in More Than two decades as it toughens its fight against fast rising prices.

The Federal Reserve said it was raising its benchmark interest rate by half a percentage point, following a smaller increase in March.

With Us inflation at a four-decade high, further hikes are expected.

The Push marks the latest effort to contain spiking costs being felt by households around The World .

India's Central Bank on Wednesday announced a surprise increase to its benchmark rate, while Australia's Central Bank recently enacted its first interest rate hike in More Than a decade.

The Bank of England is also widely expected to raise rates on Thursday, which would be The Fourth increase since December.

By raising rates, banks will make it more expensive for people, businesses and governments to borrow.

They expect That to cool demand for goods and services, helping to ease price inflation.

But their actions also risk triggering a sharp economic slowdown, especially as new challenges emerge, such as The War in Ukraine and recent Covid shutdowns in China.

" It's a narrow path they have to walk, " said economist Donald Kohn , who previously served on the Fed's rate-setting committee. " It's going to be a very difficult task. "

Inflation in the US hit 8. 5% in March, the sharpest annual rate since 1981, driven by accelerating costs for food and energy.

That is well above The Bank 's 2% target and has become a growing political problem for US President Joe Biden .

Many economists say the Fed has been slow to respond to The Problem , which has been fuelled by a mix of factors, including Covid-related supply shortages, a shock to energy markets from The War in Ukraine, and in the US, massive government spending - including direct cheques to households - to support the economy after the pandemic hit.

" They are well behind The Curve . I think most central banks are, " said Thomas Hoenig, senior fellow at George Mason University's Mercatus Center , who spent nearly 40 Years at the Fed.

" But if they try to correct That Error with another Error - That is to shock the economies with very large interest rate increases - I think they'll pay a pretty big price in terms of a probable recession from That . "

The rate increase announced on Wednesday was an unanimous decision. It will push what the Fed charges banks to borrow from a range of 0. 75% to 1%, with The Higher costs rippling out to consumers in the form of more expensive mortgages, credit cards and other loans.

In addition, The Bank detailed plans to wind down its $9tn balance sheet starting in June, initially by $47. 5bn per month and double That in September.

Some, like first-time homebuyer Mia Navarro, are already feeling The Effects of The Changes . She sped up her hunt for a one-bedroom apartment in Washington, DC, as she was worried higher mortgage rates would start to limit her search and what she could afford.

" When I originally started my search, I definitely had a bigger budget, based off of what the rates were at The Time , " said the 25-year-old, who ultimately bought a one-bedroom apartment for $325,000, with a mortgage rate below 5%.

" I immediately decided That I needed to move quickly. . and Get In there before they hiked too much out of my range and something That I can still afford. "

Managing soaring inflation is proving a tall order. Central banks around The World are raising interest rates to lower prices.

And the latest aggressive move by The World 's most powerful Central Bank , the US Federal Reserve is one That will reverberate around the globe.

Not only will it raise borrowing costs for Americans on everything from credit cards to mortgages, it will also Push Up the value of the US dollar. In turn, That will Push Up commodity prices and make it more expensive for emerging economies That borrow in dollars.

It is also being felt in financial markets, where asset prices were buoyed by the unprecedented levels of stimulus showered on the economy during the pandemic. As That support is removed, you have already seen more turbulence.

But the Fed has little choice. Inflation has consistently burned hotter than expected. The question is, can it successfully tame inflation without a recession.

As economists often like to say: " Expansions don't die of old age".

Source of news: bbc.com