The US Federal Reserve announced its interest rate decision as concerns grow that aggressive measures could push the economy into recession next year.
Washington (AFP) – The US Federal Reserve raised its key interest rate again on Wednesday and said more increases were coming as it battled rising prices – an aggressive stance that has raised fears of a recession.
This was the third consecutive increase of 0.75 percentage point by the policy-setting Federal Open Market Committee (FOMC) of the Federal Reserve, which continues the aggressive work of curbing inflation that has surged to a 40-year high.
The increase takes the policy rate to 3.0-3.25 percent, and the FOMC said it “expects that continued increases … will be appropriate”.
Higher prices are putting pressure on American families and businesses and have become a political burden on President Joe Biden, as he faces midterm congressional elections in early November.
But a contraction of the world’s largest economy would be an even more damaging blow to Biden, to the credibility of the Fed and the world at large.
Federal Reserve Chairman Jerome Powell has made clear that officials will continue to act aggressively to calm the economy and avoid a repeat of the 1970s and early 1980s, the last time inflation got out of control in the United States.
It took tough — and sluggish — to finally bring down rates in the 1980s, and the Fed is unwilling to give up its hard-earned credibility in fighting inflation.
The Federal Reserve’s quarterly forecast released with Wednesday’s interest rate decision shows that FOMC members expect a sharp slowdown with US GDP growth of just 0.2 percent this year, but a return to expansion in 2023, with 1.2 percent annual growth in cent.
Powell’s post-meeting press conference will be closely scrutinized for clues as to how much he thinks the Fed will have to do before declaring victory in the inflation battle.
FOMC members see further price increases this year and next, with no cuts until 2024.
– Doubts, pressure –
KPMG economist Dianne Sonk warned that the central bank will come under increasing pressure, especially if unemployment starts to rise and Fed officials become “political pinatas.”
While the FOMC has pointed to continued “strong” job gains in recent months and a drop in the unemployment rate, expectations are that the unemployment rate will rise to 4.4 percent next year and stabilize around that level until 2025.
Powell and other central bankers have been sending the same message: deflation is better than continued high inflation given the pain it can inflict, especially on those least able to bear it.
Inflation is a global phenomenon amid the Russian war in Ukraine at the top of the global supply chain and the Covid lockdown in China, and other major central banks are taking action as well.
Many economists say that at least a short period of negative US GDP in the first half of 2023 will be required before inflation begins to decline.
Despite a welcome drop in pump gasoline prices in recent weeks, a disappointing August CPI showed broad increases.
The FOMC statement referred to “broader price pressures” beyond food and energy, and stressed that officials were “strongly committed to bringing inflation back to its 2 percent target.”
The Fed has tolerated rate increases, raising the benchmark lending rate four times this year, including two consecutive three-quarters-point increases in June and July.
The goal is to raise the cost of borrowing and cool demand, and this has an effect: The housing market has slowed with higher mortgage rates.
“The irony here is that while the Fed is ramping up anti-inflation rhetoric to fever pitch, the forces needed to bring down inflation over the next year are now in place,” said Ian Shepherdson of Pantheon Macroeconomics.
US stocks turned negative after the announcement.