US Federal Reserve orders biggest rate rise in 28 years

US interest rates will rise by 0.75 percentage points to more than triple the level of three months ago, in an effort to combat surging inflation.

US Federal Reserve Chair Jerome Powell speaks to reporters. Picture: AFP.

The US Federal Reserve has ordered the biggest interest rate increase in 28 years, lifting the federal funds rate 0.75 percentage points to 1.75 per cent – more than triple the level of three months ago – in an effort to combat inflation that has surged to 40 year highs.

The large increase was designed to demonstrate the Federal Reserve’s determination to return inflation to the 2 per cent target, even at the risk of pushing the US economy, which shrank unexpectedly in the first quarter of the year, into recession.

“I do not expect moves like this to be common,” Fed Chairman Jerome Powell said in the press conference after the meeting, describing the move as “unusually large”.

“Inflation has obviously surprised on the upside and further surprises could be in store”.

The chance of a historic, 0.75 percentage increase was all but guaranteed after last week’s official inflation report showed the US CPI had increased 8.6 per cent over the 12 months to May, the highest level since early 1981.

Inflation has been above 8 per cent for three months in a row, repeatedly defying expectations among economists and hopes of Biden administration officials that price pressure would start to dissipate.

“The next meeting could be a decision between 50 and 75 [basis points] … putting us in that more normal range,” Mr Powell said, referring to the next FOMC meeting in July.

All but one of the 12 voting members of the Federal Open Market Committee, the Fed’s policy setting committee, voted in favour of the outsized increase.

“The Committee is strongly committed to returning inflation to its 2 per cent objective,” the Fed statement said, noting it was sticking to its announced timetable of shrinking its US$9 trillion balance sheet after years of rapid expansion to accommodate massive budget deficits.

The Fed’s official interest rate was expected to increase to at least 3.4 per cent by the end of the year, according to the average of which would leave the benchmark rate at the highest level since 2009.

“We’d like to see demand moderating, it’s been very hot recently … demand is substantially stronger than supply,” he added, referring to the historically low unemployment rate of 3.6 per cent.

The benchmark S & P500 index, after a torrid few days of trading, advanced steadily by more than 1 per cent ahead of the 2pm announcement, holding onto those gains during Chairman Powell’s press conference.

US blue chip stocks entered a bear market earlier this week – a decline of more than 20 per cent since the most recent, January peak – as investors factored in the high likelihood of higher inflation and interest rates.

“The invasion of Ukraine by Russia is causing tremendous human and economic hardship … In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks,” the Fed statement said.

The increase came as President Joe Biden, whose popularity has taken a hit during the inflation surge, warned seven US oil giants against withholding supply and profiteering from high oil prices.

“Your companies need to work with my Administration to bring forward concrete, near-term solutions that address the crisis,” he said. Soaring inflation has rattled the Democrat administration, which has sought to blame soaring prices on Russian president Vladimir Putin’s invasion of Ukraine and supply chain bottlenecks in the wake of the Covid-19 lockdowns