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The Federal Reserve raises interest rates by 0.50 percentage points to the highest level since 2007

The increase is a slight reduction on previous raises but still pushes base rates to their highest in fifteen years.

Tasa de interés de la Reserva Federal: Cuándo volverá a subir y por cuántos puntos

Despite back-to-back months of reduction in the rate of inflation, the Federal Reserve has persevered with its mission to tame it further by once again increasing interest rates.

The key interest rate has been increased by 0.5 percentage points to a target range of 4.25% to 4.50%, the highest since late 2007 during the banking crisis.

A forecast from the central bank showed that the interest rate could still be at 5% in a year’s time, meaning more increases are likely before they begin to taper off. At the beginning of 2022 the interest rate was nearly 0%.

Federal Reserve chair Jerome Powell said that “the inflation data received so far in October and November show a welcome reduction in the pace of price increases, but it will take substantially more evidence to give confidence inflation is on a sustained downward path.”

What does further interest rate increases mean?

The 0.5 percentage point increase is a smaller increase compared to the 0.75 point increases enacted by the Fed earlier this year. Increasing interest rates is a blunt tool for central banks to crush inflation by making borrowing less enticing and stopping people spending, adding a risk of a recession.

The Fed is now predicting that core inflation, which excludes food and energy , will fall from 5% on an annual basis in October to 3.5% at the end of next year. While gas prices are now lower compared to the beginning of the war in Ukraine, food inflation still has a 10.6% year-on-year increase, a worry for many Americans.

“The (Federal Open Market) Committee is highly attentive to inflation risks ... Ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the Fed said in a statement.