Fed Prepared for Major Rate Hikes as US Inflation Soars to Highest Level in 41 Years

The US Federal Reserve appears ready to step up its agonizing description of rising interest rates after inflation in the world’s largest economy rose to its highest level in more than 40 years.

In a report that sent shockwaves through financial markets, the US government said inflation rose to 9.1 percent in June, a level not seen since November 1981.

Investors were chasing last night at the 60 per cent possibility of the Fed raising interest rates by a full percentage point at its next meeting in two weeks.

This would be the largest interest rate hike since December 1980 and would follow an increase of 0.75 percentage points last month.

Speculation that the Fed would take such a drastic move mounted after the Bank of Canada, which is also facing an inflation battle, announced yesterday that it raised its full rate by a percentage point.

Chris Zaccarelli, chief investment officer of the Independent Advisors Association, said that inflation in the United States is now “staggeringly high.” “It is higher than expected and shows that inflation is rapidly going in the wrong direction,” he said.

America’s increasingly aggressive response to inflation has seen rival currencies grow stronger than the dollar in recent weeks – and analysts have warned it could get even tougher.

Yesterday, the euro briefly fell below the dollar level for the first time in two decades, reaching $0.99 shortly after the data was released.

Sterling also temporarily lost ground, falling towards a two-year low of $1.18.

The turmoil also spread to the oil market, with Brent crude falling to $99.61 a barrel.

Stocks were also choppy, with the FTSE 100 closing at 53.49 points, or 0.7 percent, down at 7,156.37 while the S&P 500 in New York sold off for the fourth consecutive day.

Market action was tempered later in the session, with some experts suggesting inflation had now peaked and downplaying talk of a percentage point increase. US President Joe Biden said the inflation figures were “unacceptably high” but insisted the data did not reflect further recent declines in fuel prices. The Federal Reserve has been raising interest rates in an attempt to cure the scourge of inflation by calming demand.

Rising commodity costs and supply chain bottlenecks that led to the initial price spike could be temporary, but an inflamed labor market — with nearly two vacancies for every unemployed person — is raising wages, and risks prolonging the crisis.

However, the Fed’s medicine to cure the problem is to put pressure on consumer and corporate borrowers. This can have the unpleasant side effect of tipping the economy into recession.

The effects of higher US interest rates are also being felt around the world, squeezing borrowers of dollar-denominated debt as well as importers of dollar-denominated commodities, including oil.

US interest rates have been hovering around zero since the start of the pandemic in early 2020 but with inflation rising much more quickly than the Fed expected, the central bank dosed the economy with increments of 0.25 percentage point in March, 0.5 percentage point in May and 0.75 percent. percent. point in June.

The latest move was the largest increase since 1994.

Markets are anticipating that the latest inflation figures will fuel at least another rally of the same magnitude again.

The Fed has not raised interest rates by a single percentage point or higher since December 1980, under the leadership of Paul Volcker, who was a central bank chief known for his hawkish style of calming a price spiral in America.

In stark contrast to the Federal Reserve, the European Central Bank, which is experiencing record inflation of 8.6 percent, is still holding its interest rate at minus 0.5 percent, although this is widely expected to move later this month. .