The central bank is ramping up its drive to tighten credit and slow growth with inflation having reached a four-decade high of 8.6%, spreading to more areas of the economy and showing no sign of slowing.
Federal Reserve

Consumer prices surged 8.6% last month from a year earlier, faster than April’s year-over-year increase of 8.3%, the Labor Department said Friday. The new inflation figure, the highest since 1981, will heighten pressure on the Federal Reserve to continue raising interest rates aggressively.

The S&P 500 rose 1.9%, with technology and financial sector stocks doing much of the heavy lifting for the benchmark index. The Dow Industrial Average rose 2% and the Nasdaq climbed 1.6%.

The substantial half-point hike in its benchmark short-term rate that the Federal Reserve announced Wednesday won’t, by itself, have much immediate effect on most Americans’ finances. But additional large hikes are expected to be announced at the Fed’s next two meetings, in June and July, and economists and investors foresee the fastest pace of rate increases since 1989.

The wilder action was in oil and Asian stock markets, where tightened anti-COVID measures in China are raising worries about demand for energy and about disruptions to manufacturing and global trade. Oil prices tumbled more than 8%, taking some pressure off the world’s high inflation, and a barrel of U.S. crude fell below $95 after starting the week above $109.

The stock market extended its three-week decline and put the benchmark S&P 500 on track for a so-called correction — a drop of 10% or more from its most recent high.

Economists are now voicing a more discouraging message: Higher prices will likely last well into next year, if not beyond.

The Federal Reserve signaled Wednesday that it may act sooner than previously planned to start dialing back the low-interest-rate policies that have helped fuel a swift rebound from the pandemic recession but have also coincided with rising inflation.

Federal Reserve Chair Jerome Powell underscored the U.S. economy’s ongoing weakness Tuesday in remarks that suggested that the Fed sees no need to alter its ultra-low interest rate policies anytime soon.

The Fed announced no new actions after its latest policy meeting but left the door open to provide further assistance in the coming months.

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While the U.S. economy continues its record-breaking expansion, some wonder whether the Fed reacted to softening global markets or perhaps even pressure from President Donald Trump.

The Fed under Chairman Jerome Powell has signaled that rising economic pressures — notably from President Donald Trump’s trade wars and from a global slowdown — have become cause for concern. So has an inflation rate that remains chronically below the Fed’s target level.