Fed raises US interest rates to 22-year high as it continues to tackle inflation

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The Federal Reserve – the US central bank known as the Fed – has recommenced its programme of interest rate increases and has not ruled out further hikes.

The rate has been increased by 0.25 percentage points in an effort to further bring down inflation and said the full effect of previous raises has yet to be felt.

As a result, it will continue to assess the effect of rate rises, examining the impact on the economy, to determine if more rises are needed.

The Fed had decided to hold interest rates last month, after 10 consecutive rises, as inflation fell in May to its slowest pace in more than two years.

Thursday’s rise comes despite the rate of price rises dropping further than expected – to 3% in the year up to May – as the Fed seeks to bring inflation down to its 2% target.

The process of getting inflation down to 2% “has a long way to go”, said the Fed chair, Jerome Powell, and the May 3% figure was described as “just one reading”.

Further data is needed before more hikes can be ruled out, he said, and it’s possible rates will be raised again in September, but also possible they’ll remain as they are.

The UK inflation figure is more than double the US rate, which official figures show stood at 7.9% in the year up to June.

Following the Fed’s announcement, US interest rates stand at 5.25% to 5.5%, a high not previously seen for 22 years and up from 5% to 5.25% before the announcement.

In the US, the interest rate is a range, rather than a single percentage – unlike the UK – because the Fed does not set a specific figure. Instead, the figures are a target rate to guide lenders.

Central banks across the world have been increasing interest rates in an effort to take money out of the economy, making borrowing more expensive and encourage saving.

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Sky’s Ed Conway talks us through the announcement on the UK’s inflation data.

Last month, the Bank of England upped the base interest rate to 5% and is forecast to raise rates again in August.

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