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US central bank raises interest rates to 16 year high

The Federal Reserve (The US Central Bank) has decided to increase interest rates for the 10th consecutive time

A photo of Grace Lynch, the author

By Grace Lynch

Published on: 5 May 2023

2 min read

US central bank raises interest rates to 16 year high

Who are the Federal Reserve?

The Federal Reserve (often referred to as simply The Fed) is the central banking system of the United States of America (USA). Like our own UK Bank of England, the Federal Reserve set interest rates to keep the economy stable. The base interest rate in the US is now 5.25%, rising a quarter point from the previous figure (5%).

Here in the UK our interest rates have also been on a steady climb over the last year, so it is unsurprising this is also occurring in the US. Economic uncertainty, soaring prices of oil gas and more are contributing to significant financial difficulty in both the UK and America.

The chair of the Federal Reserve, Jerome Powell has indicated the US is near the end of their series of rate hikes – but nothing is guaranteed. Instead, he has stated that any future actions will be ‘driven by incoming data’.

Why are US interest rates rising?

US interest rates are based on the same principles as UK interest rates. The Central Bank (in this case the Federal Reserve) raises interest to tackle rising inflation.

Though US inflation is currently far lower than the UK (5% vs 10.1%), this is still higher than the ideal rate of 2%. High inflation can cause major problems for an economic system, so banks will always work hard to decrease it where they can.

What will happen next?

It is hard to say for certain what will happen next, as the decision to increase or decrease rates will be based on data gathered over the next few months.

If inflation can be brought down further, the need for higher rates will no longer be necessary. Tighter restrictions on credit following banking failures have helped to reduce inflation in recent months. Whether this continues or inflation rises again remains to be seen.

Latest news about UK interest rates

This article covers the latest updates in the US financial news. Below we have some of our latest articles about UK interest rates and inflation if you would like to learn more.

Resources

Federal Reserve – About the Fed

Federal Reserve – Monetary Policy

US Department of the Treasury – Interest Rate Statistics

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