US Federal Reserve decides to go big on interest rates

The Federal Reserve has announced its largest rate hike in 28 years – by 0.75% – in attempt to solve the inflation crisis in the country.

As a result, the short-term rate now varies from 1.5% to 1.75%. This is the first time the Fed has decided to raise the rate by this much since 1994, which means the inflation is more difficult to restrain than it was expected.

Forecasts of a huge rate increase have intensified days before the Fed’s announcement as a new government report showed prices rose at their fastest pace since 1981 in May. The annual increase was 8.6%.

Such disappointing inflation numbers coincided with consumer confidence going down at the beginning of June to its lowest level in history, the University of Michigan says. It has pushed the Fed to a stronger rate hike.

Last month, Fed Chairman Jerome Powell noted a 0.75% increase was “not among the options the committee is actively considering”. However, markets started predicting an aggressive increase because of the darker outlook on inflation and consumer sentiment.

Meanwhile, US mortgage rates have already risen last week even before the Fed’s decision: the average rate for a 30-year fixed mortgage went up from 5.55% to 6.28% just in 7 days.

The rate, which was only 3.11% at the end of 2021, has been growing during the year, following the record low level seen over the COVID-19 pandemic. It has risen significantly as the Fed ends its mortgage-backed bonds program, causing a cooldown in the real estate market with a lower demand.

Considering very high inflation in Canada, Bank of Canada could follow the Fed’s pass on July 13 and increase its rate by 0.75% as well.