With rising inflation and the shadow of the recession projected in the United States, the Federal Reserve on Wednesday announced a 0.75 percentage point increase in interest rates, the largest rise since 1994.
Until this week, the Fed was expected to announce a smaller increase. At a news conference, Fed Chairman Jerome Powell said the central bank decided it needed a bigger hike following recent economic news, including last week’s announcement that inflation had risen to a maximum of 40 years.
He made it clear that a similar rate hike would be expected at the next July meeting, unless price increases slow down. “We at the Fed understand the difficulties that inflation is causing,” he said. “Inflation cannot go down until it is flattened. That is what we are looking to see.”
The rise will raise the Fed’s federal funds benchmark rate to a range of 1.5% to 1.75%, and officials said they expected rates to rise to at least 3% this year.
Powell acknowledged that the Fed’s attempt to cool spending is likely to lead to job losses. The Fed expects unemployment to rise to 4.1% from the current rate of 3.6% as it tries to return inflation to its target rate of 2%.
“We never seek to leave people out of work,” Powell said. But he added: “You really can’t have the kind of job market we want without price stability.”
The rate hike came after more bad news on inflation at the end of last week plunged US stock markets, presenting the Fed and the Biden administration with a growing crisis amid fears that rampant inflation has spread throughout the economy.
The Fed cut interest rates to near zero at the start of the coronavirus pandemic, as the U.S. and world economies were effectively closing. It raised rates for the first time since 2018 in March this year, but the increase did nothing to curb rising prices.
Powell initially described the price hike as “transient,” but has changed his view, saying the Fed intends to aggressively raise rates in order to regain price control.
There are already indications that consumers are shrinking in the face of rising inflation. Retail spending fell for the first time this year in May, the Commerce Department said Wednesday. Home sales have fallen for three consecutive months and consumer confidence hit an all-time low between May and June.
Last week, the Labor Department announced that consumer prices were 8.6% higher in May than a year ago. The increase was wide, with rising food and fuel prices along with rent, air fares and car prices.
Across the country, consumers are facing rising prices and shortages. Nationwide, gas now costs an average of $ 5 a gallon, about $ 2 more than a year ago. In California, a gallon of gas now costs more than $ 6, more than just over $ 4 a year ago.
Supply chain disruptions and other problems have led to a shortage of basic necessities, such as tampons and infant formula.
On Wednesday, Joe Biden summoned senior oil executives to the White House to discuss ways to “work with my administration to come up with concrete, short-term solutions to address the crisis.”
Biden’s handling of the issue of inflation has affected his poll numbers. With the crucial midterm elections and the control of Congress approaching November, Biden’s approval rating is 33%, according to the University of Quinnipiac’s national poll, equal to the lowest rating of its administration.
Many parts of the economy remain strong, and the Fed is targeting a “soft landing,” hoping to tame inflation by raising rates without sharply raising the unemployment rate, but Powell acknowledged that some risks , including the war in Ukraine, were out of influence. of the Fed.
Nearly 70 percent of academic economists surveyed by the Financial Times and the University of Chicago’s Booth School of Business now believe the U.S. economy will plunge into recession next year.