For the first time in more than three years, the United States Federal Reserve has raised interest rates amid mounting inflationary pressures and consumer frustration. The unanimous decision on Wednesday, supported by all 12 members of the Federal Open Market Committee (FOMC), raised rates by a quarter of a percentage point, underscoring the central bank’s commitment to lowering prices. The Fed’s benchmark rate is now set between 3.75 percent and 4 percent.
The US Fed has a dual mandate of maximising employment and stabilising prices, maintaining a 2 percent inflation target. After soaring for years during the COVID-19 pandemic, inflation had finally started to taper closer to target. But over the last several years it has been on the upswing once again and hit 3.4 percent last month.
That comes on the back of tariffs unleashed by President Donald Trump on most trading partners, as well as by the US war in Iran and increased spending on artificial intelligence. The Fed said Wednesday’s rate increase “will support a timelier return to the Committee’s 2 percent goal”. The rate hike has a litany of possible economic and political ramifications.
The increase will hit any US consumer who is paying interest on credit card debt. It will also make it even more expensive for those who hope to borrow for homes, automobiles and other expensive purchases. When the Fed raises the cost of borrowing it also reduces demand for items, which could impact US businesses and risk the health of the economy.
The rate increase also comes at an inopportune time for Trump and the Republican Party, less than 50 days before the November midterm elections that will determine whether Republicans or Democrats control the US Congress. US consumers have faced years of increasingly higher prices, most recently at the gas pump with the average price for a gallon of petrol hitting $4.36 ($1.15 per litre), up 14 cents in the past week and up from $3.18 a year ago, according to the American Automobile Association (AAA). Voters could opt to vent their frustrations at the ballot box, offering Democrats a chance to seize one – or even both – chambers.
US banks looking to borrow money from the Fed will immediately start paying the higher lending rate. Consumers with credit cards, which generally have variable interest rates that closely follow the prime rate that banks charge their customers, could see their minimum payments increase within a month, as could home owners with variable interest rate mortgages. The decision is a blow for Trump, who has frequently clashed with the Fed over lowering borrowing costs.
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