Federal Reserve hikes official interest rates by 0.5 per cent, Dow Jones jumps 900 points

The US central bank has increased official US interest rates by an expected 0.5 per cent to curb the biggest price rises seen in 40 years.

In an unanimous decision, the US Federal Reserve has lifted the federal funds rate by 50 basis points to a new target range of 0.75 per cent to 1 per cent, the biggest increase in 22 years.

Despite a slowdown in the US economy over the first few months of the year, the Fed’s policy setting committee said that household spending and business investment remained strong, although it noted inflation was high because of the war in Ukraine and the COVID-19 lockdowns in China.

“Job gains have been robust in recent months, and the unemployment rate has declined substantially,” the Fed said.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures.”

At a press conference after the release of the Fed’s policy statement, Mr Powell played down the prospect of a 0.75 per cent rate hike.

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However, he said more 0.5 per cent increases were possible at the next couple of meetings.

“If we see what we expect to see, then it will be 50 basis points on the table at the next two meetings,” he said.

The move saw the greenback fall to a one-week low of 102.48 on the US dollar index.

“The market was pricing in essentially a 50-50 chance that you see a 75-basis-point hike by July, between June and July. And, so, I think the most important takeaway here … [is that] the market was really fixed on, was whether or not a 75-basis-point hike is on the table, and [Mr Powell] basically pushed back on that,” said Mazen Issa from TD Securities in New York.

The US central bank said its $US9 trillion ($12.4 trillion) worth of bonds would be allowed to decline by $US47.5 billion a month in June, July and August.

The bonds will be allowed to mature and roll off the Fed’s balance sheet, rather than being sold into the market by the Fed.

US stocks soar

Stocks on Wall Street surged as investors bet on the US central bank slowing inflation without causing a recession.

They were heartened by Mr Powell ruling out a 75-basis-point increase in the federal funds rate.

Meanwhile, the Dow Jones index jumped 2.8 per cent, to 34,061, the S&P 500 index rose nearly 3 per cent, to 4,300, and the Nasdaq rose 3.2 per cent, to 12,965.

It was the biggest gain in two years for the Dow and the S&P indices.

Shares in ride-share firm Lyft fell by one third on concerns about the company’s customer levels and spending.

That was despite first-quarter revenue rising by 44 per cent, to $US875 million.

In Europe, major markets ended in the red thanks to lacklustre earnings.

The FTSE 100 in London fell by 0.9 per cent, to 7,494, the DAX in Germany lost 0.5 per cent, to 13,971, and the CAC 40 in Paris dropped 1.2 per cent, to 6,396.

The Australian dollar jumped by 2.3 per cent, to 72.59 US cents, as the greenback fell to its one-week low and the local share market is set to rise today, with the ASX SPI 200 index up 0.5 per cent, to 7,308, at 6:30am AEST.

Spot gold rose 0.7 per cent, to $US1880.92 an ounce, while Brent crude oil jumped $US5 a barrel, or 4.9 per cent, to $US110.10, as the European Union moved closer to banning Russian oil imports by year’s end .

ABC/Reuters

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