The United States Federal Reserve has hiked interest rates by 75 basis points, the biggest rise since 1994.
US Federal Reserve Chair Jerome Powell. Photo: AFP / Getty Images
The move comes after US inflation hit a 40-year high of 8.6 percent in May.
Russia's invasion of Ukraine and related events are creating additional upward pressure on inflation, and are weighing on global economic activity, the US central bank said.
The rise is the third since March and more increases are likely, the bank said.
"From the standpoint of our congressional mandate to promote maximum employment and price stability the current picture is plain to see, " Federal Reserve chair Jerome Powell said.
"The labour market is extremely tight and inflation is much too high.
"Against this backdrop today the Federal Open Market Committee raised its policy interest rate by three-quarters of a percentage point and anticipates that ongoing increases in that rate will be appropriate."
Powell acknowledged the rates hike was much bigger than the central bank's usual increases.
"Clearly, today's 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common."
The central bank's move pushes its target range to 1.5 percent to 1.75 percent - the highest level since 2019.
Forecasts released after the meeting showed officials expect interest rates could reach 3.4 percent by the end of the year, a move that will ripple out to the public in the form of higher borrowing costs for mortgages, school loans and credit cards.
The US slashed rates to support the economy when the pandemic hit in 2020. This year, the bank has already raised rates twice, by 0.25 percentage points in March and another half point in May.
At the time, Powell said officials were not considering sharper rises, but the 8.6 percent inflation figure released on Friday - which showed US inflation rising at the fastest pace since 1981 - pushed officials to move more aggressively, Powell said.
"Inflation has obviously surprised to the upside over the past year and further surprises could be in store," he said. "We therefore will need to be nimble."
Financial Times journalist Alexandra Scaggs said the Federal Reserve had been talking up tighter monetary policy for so long that that financial markets had already reacted, for example raising mortgage rates to the highest in years at just over 6 percent, yet there was still strong inflation.
Conflict in Ukraine, commodity price rises and and supply chain problems were outside the bank's control, leaving a lot of uncertainty for the Federal Reserve.
"They have this really delicate balancing act to walk," Scaggs said.
"If they raise rates too high they could cause a recession ... but then if the Fed doesn't move fast enough and inflation really continues to take off people will start spending less - there will be a slowdown on its own as well."
"They have this really delicate balancing act to walk" - Financial Times journalist Alexandra Scaggs
Many analysts say the Fed is struggling to catch up, after inflation started to emerge in the US last year, sparked by a stronger than expected economic rebound from the shock of the Covid-19 shutdowns.
With demand surging, helped by trillions of dollars in government pandemic relief, including direct cheques to households, officials, including Powell, initially dismissed the price rises as transitory, arguing they would abate as supply chain issues related to the virus resolved.
But the problems have proven persistent, as new outbreaks of virus variants and ongoing Covid-19 shutdowns continue to disrupt activity, and the war in Ukraine propels global food and energy prices higher.
- RNZ / BBC