WhatsNew2Day
Latest News And Breaking Headlines

US Federal Reserve hikes interest rates by another 0.75 percentage point

Issued on:

The US Federal Reserve raised its benchmark interest rate again by three-quarters of a percentage point on Wednesday in its ongoing battle to address raging price pressures that are weighing on US households.

It was the second consecutive 75 basis point hike and the fourth rate hike this year, as US central bankers act aggressively to cool the steepest rise in inflation in more than four decades without derailing the world’s largest economy.

As the Fed noted signs that the US economy is slowing, it signaled plans to continue raising borrowing costs — and Fed Chair Jerome Powell made it clear that an even bigger rate hike is possible.

“Inflation is way too high,” Powell told reporters, saying the Fed will continue to raise interest rates until there is solid evidence that inflation is returning to its two percent target.

Another “unusually large increase could be appropriate” at the next meeting in September, Powell said, stressing that U.S. central bankers “would not hesitate to take a bigger step than we have today,” if warranted.

President Joe Biden faces political backlash over rising prices, mostly due to Russia’s invasion of Ukraine that pushed global food and energy prices soaring.

In a vote that was unanimous — contrary to the decision taken in June — the Fed’s policy-making Federal Open Market Committee (FOMC) raised its benchmark lending rate to a range of 2.25 to 2.5 percent, after nearly a year earlier. starting from zero.

Economists say this is the Fed’s most aggressive tightening cycle since the 1980s, when stagflation — a wage-price spiral and stagnant growth — crippled the US economy. But the Fed chief acknowledged that at some point, policymakers may slow the pace of rate hikes.

Wall Street seemed relieved by Powell’s comments, with solid gains in all three major stock indices, including the blue-chip Dow, which ended up more than 430 points.

The challenge for policymakers is to contain inflation before it becomes dangerously entrenched – and without sending the world’s largest economy into a recession that would reverberate around the world.

Powell has made it clear that they are willing to risk a recession.

But on Wednesday, he expressed confidence that the United States can avoid that fate, and that the Fed can achieve a “soft landing,” taming inflation without triggering a recession.

“We’re trying to do just the right amount. We’re not trying to get into a recession and we don’t think it’s necessary,” Powell said.

yH5BAEAAAAALAAAAAABAAEAAAIBRAA7

Recession risk

The Fed chairman nevertheless acknowledged that the path to threading that needle “has narrowed.”

With government data on Q2 GDP expected to be released Thursday, there is intense focus on whether another negative reading will mean the economy is in recession.

The economy shrank 1.6 percent in the January-March period and while the consensus forecast for the last three months calls for modest growth, many economists expect a downturn.

Two consecutive quarters of negative growth are generally considered a sign that the economy is in recession, although that is not the official criterion.

But Powell said he doesn’t think the country is currently in a recession because “too many parts of the economy are underperforming.”

Although “it is necessary to slow growth… We think there is a way to reduce inflation while maintaining a strong labor market.”

US prices have continued to rise, and he complained about the hardships faced by families whose salaries don’t reach that far into the grocery store.

But the pace appears to be slowing, and pump gas prices are down more than 70 cents from the record high of just over $5 a gallon in mid-June.

Meanwhile, rising mortgage rates have slowed home sales for five straight months, and the FOMC statement noted that “recent indicators of spending and manufacturing have softened.”

Policymakers seemed to recognize that some factors are beyond their control.

“Russia’s war on Ukraine is causing enormous human and economic hardship. The war and related events are putting additional upward pressure on inflation and weighing on global economic activity,” the FOMC statement said.

Nancy Vanden Houten of Oxford Economics still expects a three-quarters point rate hike at the next policy meeting, but after that, she says, “we’ll wait for the Fed to switch back to a slower rate hike of 25 basis points.”

Other economists are now calling for a smaller increase of half a point.

The Fed will release two more important monthly data, on employment and consumer prices, by then.

(AFP)

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More