US Federal Reserve Raises Base Rate to 22-Year High

Key insights

• The US Federal Reserve returned to raising rates after a short break.
• It has been raised to a range of 5.25-5.5%, the highest level in 22 years.
• This is the 11th rate hike since the beginning of last year.

The US Federal Reserve System (FRS) has increased its key rate by 25 basis points to a range of 5.25-5.5%, according to a statement on the FRS website. The base rate refers to the percentage at which commercial banks in the United States lend to each other for short periods.

The rate increased for the 11th time since the beginning of 2022 and reached its highest level in 22 years.

Investors want signals from the Fed about its intentions, wrote Bloomberg. In June, inflationary pressures in the United States eased, and some market participants do not expect new increases in the base rate in 2023, the agency noted. But Citigroup economist Veronica Clark, speaking with the agency, admitted that the Fed will leave itself room for different decisions:

They will definitely act cautiously after just a few months of softer inflation data, which will not be enough to convince the Fed that its job is done.” Clarke noted.

Fed chief Jerome Powell said in June that the base rate could be raised two more times in 2023.

At a meeting in June, the US Federal Reserve left the rate unchanged, taking a pause in raising for the first time in more than a year. This was done in order to slow down the pace of rate hikes as they approach the level considered sufficient to return inflation to the 2% target, Bloomberg wrote.

Powell will continue to take an observant position: he will make it clear that at the next meeting in September there will be no decisions to raise the rate, and this pause will eventually become long, Anna Wong, senior economist at Bloomberg Economics for the United States, said.

Other analysts do not exclude the possibility of another rate hike after July, if statistics on inflation, jobs or other important indicators show the need for a new increase, the Financial Times noted. In this case, experts agree that the next increase could happen in November.

Annual inflation in the US in June slowed to 3%, which is at least two years. The index for all commodities except food and energy rose 4.8%, the lowest since 2021.

Read also: Can Raising Interest Rates Truly Tame Inflation?

The Fed raised the base rate continuously for 15 months from March 2022 to June 2023, including four times in a row – by 75 basis points. Reuters called such an aggressive tightening of the Fed’s monetary policy historical.