The Federal Reserve raised key US interest rates again on Wednesday and said more hikes are on the way as it battles rising prices – an aggressive stance that has fueled fears of a recession.
It was the third consecutive 0.75 percentage point increase by the Fed’s policy-making Federal Open Market Committee (FOMC), continuing strong action to push inflation to its highest level in 40 years.
The hike brings the key rate to 3.0-3.25 percent, and the FOMC said it “anticipates continued hikes … will be appropriate.”
Rising prices are putting pressure on American families and businesses and have become a political liability for President Joe Biden as he faces midterm congressional elections in early November.
But a contraction of the world’s largest economy would deal a bigger blow to Biden, the credibility of the Fed and the world at large.
Federal Reserve chairman Jerome Powell has made it clear that officials will continue to act aggressively to cool the economy and prevent a repeat of the 1970s and early 1980s, the last time US inflation spiraled out of control.
It took tough action — and a recession — to finally bring prices down in the 1980s, and the Fed is unwilling to give up its hard-won, inflation-fighting credibility.
The Fed’s quarterly forecasts released Wednesday with the rate decision show 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 an annual growth rate of 0.2 percent. growth of 1.2 percent.
Powell’s post-meeting press conference will be scrutinized for clues as to how much more he thinks the Fed will need to do before announcing victory in the inflation battle.
FOMC members see further rate hikes this year and next, with no cuts until 2024.
KPMG economist Diane Swonk warned that the central bank will come under increasing pressure, especially if unemployment starts to rise, and Fed officials “will become political pinatas.”
While the FOMC noted continued “robust” job growth and low unemployment in recent months, forecasts predict that the unemployment rate will rise to 4.4 percent next year and remain around that level through 2025.
Powell and other central bankers have sent the same message: An economic downturn is better than continued high inflation, given the pain it would cause, especially to those least able to withstand it.
Inflation is a global phenomenon amid Russia’s war in Ukraine, on top of global supply chains and Covid lockdowns in China, and other major central banks are also taking action.
Many economists say it will take at least a short period of negative GDP in the US in the first half of 2023 before inflation starts to fall.
Despite a welcome drop in petrol prices at the pump in recent weeks, the disappointing consumer price report for August showed widespread increases.
The FOMC statement pointed to “wider price pressures” beyond food and energy, and emphasized that officials are “strongly committed to bringing inflation back to the 2 percent target.”
The Fed has pre-empted its rate hikes and has hiked benchmark rates four times this year, including two straight three-quarter hikes in June and July.
The goal is to raise the cost of borrowing and cool demand, and it’s having an effect: the housing market has slowed as mortgage rates have risen.
“The irony here is that just as the Fed is feverishly ramping up its anti-inflation rhetoric, the forces needed to push inflation back in the coming year are now here,” said Ian Shepherdson of Pantheon Macroeconomics.
US stocks turned negative after the announcement.
(Except for the headline, this story has not been edited by DailyExpertNews staff and has been published from a syndicated feed.)