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Largest rate hike since 2000

The Federal Reserve increased interest rates again for the second time since 2018 in an effort to curb inflation that has hit a 40-year high. Rates will rise by 0.5 percentage points, the central bank announced yesterday after a two-day policy meeting, raising the target range from 0.25%-0.50% to 0.75%-1%. It is the largest rate hike since 2000 (see history) and the second of seven increases expected this year.

The Federal Reserve typically targets annual inflation near 2% (see why). In contrast, inflation reached an annual rate of 8.5% in March, fueled by post-pandemic spending and government stimulus. Policymakers are trying to slow down the economy by increasing the interest rate, which banks pass on to consumers, who then need to pay more to borrow money for mortgages, car loans, credit cards, and more. Costlier borrowing could prompt consumers to hold off on spending, bringing down prices.

The central bank also announced plans to reduce asset holdings on its $9T balance sheet, starting June 1 (see 101).