US Federal Reserve hikes rates for first time since 2018 as lift off begins

The US Federal Reserve today hiked the world’s most important interest rate for the first time since 2018 in what is expected to be the first step in one of the fastest tightening cycles in recent history.

Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) raised rates 25 basis points to between 0.25-0.5 per cent.

The move marks the beginning of an abrupt policy shift from the world’s top central bank to move away from supporting the American economy through the Covid-19 crisis to taming the worst bout of inflation in a generation.

The Fed also ignored concerns over the economic fallout of the Russia-Ukraine war in favour of getting on top of the cost of living stateside hitting a 40 year high of 7.9 per cent.

Markets were sent the strongest signal yet that monetary policy is on a path to tighten sharply.

The Fed intends to raise rates six more times this year, taking borrowing costs to 1.75-2 per cent by the end of the year, according to the dot plot, which illustrates where FOMC officials expect rates to land.

Yields on US government debt jumped on the news. Wall Street dipped.

It comes after Powell and other members of the world’s central banking top brass had insisted for months last year that inflation would be “transitory”.

Despite inflation taking off across the pond since the second half of last year, the Fed has left rates at rock bottom lows for 16 consecutive meetings, dating back to March 2020, to offset the negative economic impact of the pandemic.

The hike could be a cue for the Bank of England to look through a potential hit to the economy from the Russia-Ukraine and lift interest rates in the UK for the third meeting in a row.

Threadneedle Street will announce their next decision on borrowing costs at noon tomorrow. The City – much like Wall Street did with the Fed – expects the Bank to send rates 25 basis points higher, taking them to pre-pandemic levels of 0.75 per cent.