US Federal Reserve hikes rates at quickest pace in over two decades
The world’s most influential central bank today hiked interest rates at the quickest pace since 2000 in a sign the era of cheap money is coming to an end.
The US Federal Reserve lifted the financial system’s key interest rate 50 basis points to a range of 0.75-1 per cent as it scrambles to douse down the hottest stateside inflation rate since the early 1980s.
Stateside rate setters also confirmed bonds would start rolling off the central bank’s balance sheet from next month, adding that the speed of sales will ramp up over time.
The move is likely to be followed by the Bank of England today lifting UK interest rates for the fourth meeting in a row, something it has not done since it was given control of monetary policy in 1997.
Fed chair Jerome Powell and co decided to rein in policy quicker than usual to get ahead of what is already the quickest inflation rate in over 40 years.
Prices are 8.5 per cent higher than they were a year ago in the US, far above the Fed’s two per cent average inflation target.
The world’s top monetary authorities are this year expected to cool stimulative policy that has characterised the global economy since the financial crisis.
The policy shift has been triggered by inflation persistently breaching the Fed, European Central Bank and Bank of England’s targets.
Inflation is running at seven per cent in the UK, the highest level since 1992, while in the eurozone, prices are accelerating at the fastest since record began in 1999.
Markets are pricing in more 50 basis point hikes from the Fed this year.
Powell confirmed another steep hike is “on the table” at the central bank’s next meeting in June, but pushed back on speculation it could lift rates 75 basis points at some point this year.
The comments sent US stocks soaring. The blue-chip S&P 500 registered its best one day gain since May 2020, climbing three per cent.
In the UK, Threadneedle Street will send borrowing costs to three per cent by 2023, according to consultancy Capital Economics.
Rates in Britain have not been that high since 2008.
Bank governor Andrew Bailey is facing a tougher trade off between taming inflation at the expense of cooling economic growth than his American counterpart.
Top forecasters have downgraded UK growth prospects this year due to an anticipated spending cooldown in response to incomes lagging behind a worse than expected cost of living crunch.
Former rate setters have accused the Bank of stoking inflation by delaying rate hikes in the second half of last year.