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U.S. central bank hikes interest rate by biggest amount since 1994

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The Federal Reserve has raised its benchmark interest rate by 75 basis points to a range of up to 1.75 per cent, its most aggressive hike in almost 27 years as the U.S. central bank scrambles to rein in runaway inflation.

The bank’s rate, known as the federal funds rate, impacts the rates that borrowers and savers get from banks, most notably variable rate mortgages.

The bank had been expected to raise its rate by half a percentage point, but those expectations were ratcheted up in recent days as data showed the U.S. inflation rate has yet to peak, touching 8.6 per cent in the year up to May.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the bank said in explaining its decision.

Central banks cut their rates when they want to stimulate the economy by encouraging people and businesses to borrow and invest. And they raise their rates when they want to make borrowing more expensive, to try to cool down an over-heated economy.

That’s an apt description of economies around the world right now, as the cost of living is going up at its fastest pace in decades. Canada’s inflation rate is at a 31-year-high of 6.8 per cent and is expected to increase. 

The Bank of Canada has raised its interest rate three times already this year, from 0.25 per cent at the start of the year to 1.5 per cent now, in an attempt to cool things down.

The U.S. central bank hasn’t hiked its rate by 75 basis points since 1994. At that time, it was in the midst of seven hikes over a stretch of barely over a year, as the Federal Reserve at the time took its rate from three per cent to six per cent in an attempt to head off high inflation.

Fed chief Jerome Powell will have more to say about the bank’s line of thinking at a media conference later on Wednesday.

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