US hikes interest rate in biggest rise since 1994

The US Federal Reserve raised its benchmark borrowing rate on Wednesday by 0.75 percentage points.

The move comes as the Fed seeks to combat inflation in the country, which has reached highs not seen for 40 years.

Prices have risen sharply in the past year, initially because of supply chain problems due to the coronavirus pandemic, but subsequently because of Russia's invasion of Ukraine.

What did the Fed say?

In a statement, the Fed's policy-setting Federal Open Market Committee (FOMC) said despite the interest rate hike, it remains "strongly committed to returning inflation to its 2% objective."

It's the Fed's largest interest rate rise since November 1994 — with the US central bank signalling that it expects to make further hikes to the key rate in the future.

The FOMC noted that effects of Russia's invasion of Ukraine are "creating additional upward pressure on inflation and are weighing on global economic activity."

And ongoing COVID-19 lockdowns in China "are likely to exacerbate supply chain disruptions."

What could happen next?

Federal Reserve Chair Jerome Powell acknowledged that the 0.75 percentage point hike was "an unusually large one" — as the US central bank was initially expected to approve a 0.5 percentage point increase.

After looking at economic forecasts and the performance of the US economy, the committee agreed that "increasing the target range was warranted in this meeting."

Powell said although further hikes to the interest rate are anticipated, he does "not expect" major hikes like the one announced on Wednesday "to become common."

Rampant inflation in the US is placing severe pressures on families, forcing them to pay much more for food, gas and rent whilst reducing their ability to afford discretionary items.

Interest rates set to rise in Eurozone

The announcement from the world's biggest economy also comes amid rising inflation and economic uncertainty in markets around the world.

The European Central Bank signaled plans to raise interest rates for the first time in 11 years starting in July.

Last week, Germany's central bank upped its inflation prediction for 2022, after inflation in the county hit its highest rate in almost 50 years in May, at 7.9%.