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Fed raises key interest rate by 0.75% as it hardens fight against inflation

The central bank delivered its biggest interest rate hike since 1994 as the latest inflation data shows consumer prices are still climbing at a record pace.

The Federal Reserve is accelerating key interest rate hikes in light of record-high inflation.

On Wednesday, the central bank announced a rate increase of 0.75% — a sign it is acting more aggressively to fight rising consumer prices. It's the first time since 1994 that the Fed has raised the rate that much.

The three-quarter-point hike brings the federal funds rate to between 1.5% and 1.75%. The federal funds rate dictates what it costs for banks to borrow money from each other. And, generally, higher interest rates mean it's more expensive for consumers to get a mortgage, obtain a loan to buy a vehicle and to carry a balance on a credit card.

The expected effect of these changes is that consumers will spend less and the heightened demand for goods — one of the drivers of inflation — will slow down.

The consumer price index, a key measure of inflation, came in at 8.6% last week on a year-on-year basis — hotter than expected. That triggered volatility in the stock market early this week. Notably, food price increases are hitting 40-year highs, while gas prices are also at a record-high. On Monday, the S&P 500 officially entered bear market territory.

Market watchers say the Federal Reserve is trying to thread the needle of cooling off inflation while not tanking the broader economy.

“Chairman Jerome Powell and his colleagues are walking a monetary policy tightrope hoping to avoid a recession while dampening demand," said Mark Hamrick, senior economic analyst at Bankrate in a note.

Jerome Powell, President Joe Biden, and Janet Yellen
Chairman of the Federal Reserve Jerome Powell, President Joe Biden and Treasury Secretary Janet Yellen in the Oval Office on May 31.Saul Loeb / AFP via Getty Images file

So far, he said, the Fed's actions have caused stocks to fall and made borrowing much more expensive, especially in the housing market, where mortgage rates are now the highest in over a decade.

Hamrick has some advice on how to handle the current monetary environment: pay down debt and look to higher-yielding savings accounts.

“In this rising interest rate environment, borrowers are advised to focus on paying down debt, prioritizing variable rate interest such as with credit cards,” he said. “A more promising environment is developing with respect to savings, particularly with higher-yielding online accounts.”

As for stock investors, Hamrick says to stay the course.

“Those with long-term investment horizons, such as involving retirement accounts, should be rewarded when the stock market inevitably eventually enters a more constructive environment,” he said.