Federal Reserve Chairman Jerome Powell said policy makers must continue to act aggressively to curb the raging price pressures that are putting pressure on American households.
Washington (AFP) – The Federal Reserve is preparing to launch another massive interest rate hike this week after the latest data showed a worrying inflation picture in the United States, underscoring the central bank’s need to continue to act aggressively.
High prices have pushed annual inflation to a 40-year high, hurting US consumers and businesses, despite a welcome drop in pump gasoline prices in recent weeks.
A disappointing August consumer price report, which was released last week, showed that housing, food and medical costs continued to rise. And when volatile food and energy prices are eliminated, so-called core inflation is accelerated.
Families have been struggling with rising prices initially caused by rising demand as the world’s largest economy emerges from the pandemic amid supply chain crises. The situation has been exacerbated by Covid lockdowns in China and rising energy and food prices due to the Russian war in Ukraine.
It is not only the current high inflation that worries policy makers, but the fear that consumers and businesses will begin to anticipate higher prices will become a permanent feature, which can lead to a dangerous downward spiral and a phenomenon called stagflation.
This fear has prompted the Fed to tolerate its rate increases, rather than follow the usual path of taking small, incremental steps over a longer period.
The US central bank has raised its benchmark lending rate four times this year, including two consecutive increases of three-quarters of a point in June and July.
The goal is to raise the cost of borrowing and cool demand — and that has an effect: Mortgage rates are now above six percent for the first time since 2008.
A third massive increase is expected on Wednesday at the conclusion of the two-day Fed policy meeting. Some people are raising the possibility that the US central bank will take a bigger step.
But fears are growing that aggressive action could push the US economy into recession, which could reverberate around the world.
“The hot core inflation numbers released this week for August have increased pressure on the Federal Reserve to raise interest rates a full percentage point instead of 0.75% at the upcoming meeting,” Diane Sonic, chief economist at KPMG US, said in an analysis.
This will be one of the most difficult and political decisions. It marks the Fed’s first move into a true recession.”
Avoid repeating what happened in the seventies –
Changes in the Federal Reserve’s benchmark interest rate
Fed Chairman Jerome Powell made clear that a recession is a risk he is willing to take. Indeed, it is a risk a central bank must take to avoid a much more dangerous outcome: a repeat of the runaway hyperinflation of the 1970s and early 1980s.
“We need to act now as frankly, aggressively as we have done and we need to continue to do so until the job is done,” Powell said in his last public comments before the policy meeting.
Powell’s predecessor from the recent high inflation era, Paul Volcker, had to take extreme measures after price hikes took hold, re-emerging past the mid-1970s peak after repeated failed attempts to tame it.
This led to a deep recession and unemployment of more than 10 percent.
The Fed’s goal is to avoid the “very high social costs type” of the Volcker era, and to maintain public confidence in the central bank’s commitment to fighting inflation.
“The clock is ticking,” Powell warned.
While the latest data showed annual US inflation slowed slightly to 8.3 per cent in August – from a peak of 9.1 per cent in June – prices actually accelerated slightly in the month, reflecting broad price increases.
Central bankers enjoy the luxury of a strong labor market, low unemployment and a resilient American consumer, but many economists now see the potential for a recession.
Former US Treasury Secretary, Lawrence Summers, is among those who have warned that unemployment must rise to control inflation.
He also favors more aggressive actions by the Federal Reserve.
“If I had to choose between 100 basis points in September and 50 basis points, I would choose a 100 basis point move to enhance credibility,” Summers said in a recent tweet.
