The largest rate increase in the US in the last 20 years


At its meeting on 4 May 2022, the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) raised the key interest rate by 50 basis points. The rise represents the largest increase in interest rates in the United States (US) since 2000, and according to Fed Chairman Jerome Powell, this increase is a response to rising inflationary pressures in the US.

In response to this interest rates increase in the US, stock market prices rose untraditionally, with stock prices soaring very high. The prestigious US DJIA stock index gained 932.27 points on Wednesday, 4 May, representing a daily increase of +2.81% and the NASDAQ stock index, which is composed mainly of shares of technology companies, even scored +3.19%. According to economic correspondents, this anomaly occurred – to some extent – because the vast majority of investors expected this increase and their assumptions were completely accurate. Investors, and especially speculative stock market traders, assumed that US central bankers would tighten monetary policy that would slow the pace of inflation, but would not cause an economic recession.

The international foreign exchange – Forex market reacted to this increase in US interest rates in relation to the US dollar (USD), which, unlike previous interest rate increases, has not increased significantly, but it still maintains its relatively strong position. On 5 May at 8:11 am CET, according to the US Dollar Currency Index (DXY), we saw the USD at the price level of 102.66 with a daily growth of +0.07%. At the time mentioned, the global currency pair EUR/USD traded on the Forex market at a mutual exchange rate of US$ 1,061 per EUR, with the current daily decline of the EUR by -0.104% against the USD.

At its meeting, which traditionally took place as a two-day meeting on 3 and 4 May 2022, the FOMC also discussed – except for the expected increase in interest rates which now reach the range of 0.75 to 1.00% p.a. – reducing its bond holdings by US$ 95 billion per month as part of its asset repurchase program. According to the plan outlined on Wednesday, 4 May, after the FOMC meeting, the balance sheet reduction will take place in stages, with the Fed allowing the limited level of bond yields to be withdrawn each month while the rest reinvested. Starting 1 June, the repurchase of treasury bills is planned to decrease by US$ 30 billion and US$ 17.5 billion for mortgage-backed securities. After three months, the bills ceiling will increase to US$ 60 billion and US$ 35 billion for mortgages. CME Investment Group analysts therefore expect the FOMC to continue raising interest rates in the fight against inflation, and the US benchmark interest rate can therefore be expected to reach a range of 2.75 to 3% per year at the end of 2022.