US Federal Reserve Raises Key Interest Rate Amid Recession Fear

US Federal Reserve raises key interest rates amid recession fears

Soaring prices are putting pressure on American families. (Represent)


The Federal Reserve raised key US interest rates again on Wednesday and said more hikes are expected as it battles soaring prices – a positive stance that has raised concerns. about recession.

It was the Fed’s third consecutive 0.75 percentage point increase, continuing aggressive action to reduce inflation that has surged to a 40-year high.

The increase brings the policy rate to 3.0-3.25 percent, and the FOMC said it “anticipates that continued increases … will be appropriate.”

Soaring prices are weighing on American homes and businesses and becoming a political responsibility for President Joe Biden, as he faces midterm congressional elections in early November.

But the slowdown in the world’s largest economy will be a bigger blow to Biden, to the credibility of the Fed, and to the world at large.

Federal Reserve Chairman Jerome Powell has made it clear that officials will continue to act aggressively to cool the economy and avoid a repeat of the 1970s and early 1980s, the last time U.S. inflation surpassed inflation. out of control.

It took a hard line – and a recession – that eventually brought prices down in the 1980s, and the Fed was unwilling to give up its triumphant, anti-inflationist credibility.

The Fed’s quarterly forecast published with Wednesday’s rate decision shows FOMC members expected a sharp deceleration with US GDP growth of just 0.2% this year, but a return to will expand again in 2023, with an annual growth rate of 1.2%.

Powell’s post-meeting press conference will be scrutinized for clues as to how far he thinks the Fed will have to go before declaring victory in the inflation war.

FOMC members are expected to raise rates further this year and next, with no cuts until 2024.

Doubt, pressure

KPMG economist Diane Swonk warned the central bank would come under increasing pressure, especially if unemployment starts to rise, and Fed officials “will become the political driver.”

While the FOMC noted that the employment rate has continued to grow “strongly” in recent months and the unemployment rate is low, projections suggest that the unemployment rate will rise to 4.4% next year and hold steady. at that level until 2025.

Powell and other central bankers sent the same message: A recession is better than continuing high inflation with the pain it will inflict, especially on those least able to endure it. .

Inflation is a global phenomenon as Russia’s war in Ukraine causes troubles in global supply chains and the Covid lockdown in China, and other major central banks are also taking action. .

Many economists argue that at least a short period of negative US GDP will be needed in the first half of 2023 before inflation begins to ease.

Despite the sharp drop in gasoline prices in recent weeks, the disappointing consumer price report for August showed broad-based gains.

The FOMC statement said it had noted “broader price pressures” beyond food and energy, adding that officials were “strongly committed to bringing inflation back to the 2% target”.

The Fed has braced for rate hikes, raising its benchmark lending rate four times this year, including two consecutive three-quarter hikes in June and July.

The aim is to raise borrowing costs and reduce demand, and it’s having an impact: The housing market has slowed due to a sharp rise in mortgage rates.

“The irony here is that just as the Fed is turning its anti-inflationist rhetoric into a frenzy, the forces needed to bring inflation down next year are already in place,” said Ian Shepherdson of Pantheon Macroeconomics. of Pantheon Macroeconomics said.

US stocks turned negative after this announcement.

(Except for the title, this story has not been edited by NDTV staff and is published from an aggregated feed.)

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