Fed unveils biggest rate hike since 1994

The Federal Reserve raised its target interest rate by three-quarters of a percentage point on Wednesday, the biggest rate hike since 1994, as it scrambles to stem a disruptive surge in inflation which has proven much more difficult to tame than expected.

Fed chair Jerome Powell (above) said policymakers "came to the view" that they needed to act more aggressively and indicated a faster path of rate hikes to come.

"Clearly today's 75 basis point increase is an unusually large one and I do not expect moves of this size to be common. From the perspective of today, a 50 basis point or 75 basis point increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting. And will continue to communicate our thinking as clearly as we can."

But with the tightening of monetary policy came an acknowledgement that the economy will slow as a result. The Fed warned that the pace of growth will be moderate, with unemployment likely to rise.

Liz Miller, president of Summit Place Financial Advisors, warned the Fed’s bold moves could lead to a recession.

"Very hard to fight inflation with interest rates and not bring down economic activity. By definition, you are raising interest rates because you are trying to slow spending. That is the definition of an economic slowdown. Whether we get a soft landing, a recession, or we are already in the start of a slowdown as I believe, there’s going to be economic consequences here."

But for now, it’s a risk the Fed seems willing to take as inflation has become the nation’s most pressing economic issue, with household sentiment worsening amid rising food and gasoline prices.

The Fed also seemed to be responding to growing alarm on Wall Street that the Fed was falling behind in its battle with inflation.

This week, stocks deepened their recent slide confirming a new bear market in the S&P 500, though stocks closed higher Wednesday after the announcement.

But the Fed's ability to control inflation could ultimately be limited, as some challenges - such as supply chain issues, higher energy prices, and the war in Ukraine - remain well out of its reach.

- Reuters