The Federal Reserve announced on Wednesday it would raise interest rates a quarter percentage point (or 25 basis points), to a 22-year high. Interest rates are now at a range of 5.25 to 5.5 percent, the highest since 2001.
The expected news comes after Federal Reserve Chair Jerome Powell hit pause on increases last month, and today’s press release stated, “The Committee remains highly attentive to inflation risks. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.”
“The Committee is strongly committed to returning inflation to its 2% objective.”
When interest rates rise, people and businesses have to pay more on their loans. They then borrow — and spend and buy — less. Companies sell less stuff because there are fewer buyers, and that usually brings prices down. And, voila: Inflation comes down.
The trouble is, when companies make less money, they also don’t expand, and will often lay people off. Those things can cause a recession.
The Fed is still trying for that “soft landing,” a tricky balance that would slow the economy just enough to bring inflation down without causing a recession.