Federal Reserve raises interest rates for first time in three years

The Federal Reserve is raising interest rates for the first time in three years in an effort to slow rising inflation.

The widely anticipated move that the Fed would raise rates by 25-basis points ends an easy monetary policy put in place two years ago to boost the economy during COVID. The benchmark federal funds rate is now between 0.25% and 0.5%, but six more similar hikes are expected this year as consumer prices hit a 40-year high. Six months ago, half of the central bankers didn’t think interest rate increases would be warranted until 2023. They also now expect inflation to end 2022 at 4.3%, well above the annual target of 2.3%.

The rate increase comes one week after the Labor Department said the consumer price index rose 7.9% in February from the previous year – the fastest increase since January 1982.

The Fed indicated that economic activity and employment have continued to strengthen. Job gains have been strong and the unemployment rate has declined. Inflation levels reflect supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

In addition, the invasion of Ukraine by Russia is causing tremendous human and economic hardship. The Fed said implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.