Washington: The US Federal Reserve on Wednesday raised the benchmark interest rate by three-quarters of a percentage point in its ongoing fight to cushion the furious price pressures that are squeezing American households.
It was the second consecutive 75 basis points increase, and the fourth rate hike this year, as policymakers aggressively pacified the strongest surge in inflation in more than four decades, without derailing the world’s largest economy. Steps taken.
While the Fed indicated that the US economy was slowing, it indicated plans to continue increasing borrowing costs.
President Joe Biden is facing a political backlash for rising prices, which he blames primarily on the Russian invasion of Ukraine that has driven up global food and energy prices.
Biden insists the US economy will survive a recession, but even as his approval rating has eroded, he has backed the Fed in its fight to tame inflation.
Fed Chairman Jerome Powell and others have made it clear that they are prepared to risk a recession and will continue raising interest rates until they see solid evidence that inflation is moving toward the two percent target.
In a vote that was unanimous – contrary to a decision made in June – the policy-making Federal Open Market Committee raised the policy lending rate to a range of 2.25 to 2.5 percent after starting the year near zero.
“Recent indicators of spending and production have moderated,” the FOMC statement said.
But “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices and broader price pressures,” the statement said, adding that it expects ongoing rate hikes “to be justified.” “
Economists say it has been the most aggressive Fed tightening cycle since the 1980s, when stagflation – a wage-price spiral and stagnant growth – crippled the US economy.
The challenge for policymakers is to see inflation reverberate around the world without it sending the world’s largest economy into recession without being dangerously entrapped.
Powell has argued that the US economy is on solid footing and able to withstand rate hikes, and said in Wednesday’s statement that “job gains have been strong in recent months, and the unemployment rate remains low.” Is.”
But the FOMC also clarified that it is “strongly committed to bringing inflation back to its two percent objective” — and is willing to do more if that target is threatened.
All eyes will be on Powell’s press conference starting at 2:30 p.m. (1830 GMT) to see whether he thinks the Fed may be able to relax or will continue aggressive moves.
Policy makers acknowledge that some factors are beyond their control.
“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional pressure on inflation and impacting global economic activity,” the statement said.
While prices continue to rise, rising mortgage rates have slowed housing sales for five months in a row, with home prices hitting a new record.
But global oil prices are trending down, with the US benchmark WTI falling below $95 a barrel from a peak of more than $123 a barrel in March, and gasoline prices at the pump by 70 cents from a record low of $5 a barrel. have fallen more. gallon in mid-June.
Meanwhile, the job market remains strong, and surveys suggest that inflation expectations are beginning to ease in the coming months.
Policymakers want to make a “soft landing” that controls inflation without a recession, but economists warn they face a narrow road to success and it will be easy to overshoot by getting too aggressive.
GDP declined 1.6 percent in the first quarter, and the first reading in the April-June period is due on Thursday.
Although the consensus forecast calls for modest growth, many economists expect a recession.
Two quarters of negative growth is generally considered a sign that the economy is in recession, although this is not the official norm.
“The Fed is now stuck between a rock and a hard place, with no easy way out without feeling the pain in the economy,” KPMG chief economist Diane Swonk said in an analysis, noting that “Powell acknowledged the recession.” has begun to underline that reality.” Maybe.”
“Brace yourself,” Swank said on Twitter, comparing the rise in inflation to a cancer that would spread if left untreated.
He added that the benchmark interest rate is likely to rise in the range of 3.75-4.0 per cent, which would mean an increase of 150 basis points in the coming months.
Kansas City Fed Chair Esther George disagreed at the June meeting, warning that moving too fast could be “turbulent” and raise fears of a recession, but this time voted for a bigger rate hike.
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)