NEW YORK – The Federal Reserve on Wednesday stepped up its push to control high inflation by raising its key interest rate by three-quarters of a point – its biggest rise in nearly three decades – and pointing to higher rate hikes for come that would increase the interest rate. risk of another recession.
The move the Fed announced after its last policy meeting will raise its short-term benchmark rate, which affects many consumer and business loans, to a range of 1.5% to 1, 75%.
The central bank is stepping up its momentum to tighten credit and curb growth, with inflation reaching a four-decade high of 8.6%, spreading to more areas of the economy and showing no sign. of deceleration. Americans are also beginning to expect high inflation to last longer than before. This sentiment could embed an inflationary psychology in the economy that would make it difficult to return inflation to the Fed’s 2% target.
The Fed’s three-quarters-point rate hike exceeds the half-point hike President Jerome Powell had previously suggested would probably be announced this week. The Fed’s decision to impose a rate hike as large as it did on Wednesday was a recognition that it is struggling to slow the pace and persistence of inflation, which has been exacerbated by Russia’s war on Ukraine and its effects on energy prices.
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Borrowing costs have already risen sharply in much of the U.S. economy in response to Fed moves, with the 30-year average fixed-rate mortgage rate surpassing 6%, its highest level since before. the financial crisis of 2008, with only 3% at the beginning. of the year. The yield on the 2-year Treasury bill, a benchmark for business lending, has risen to 3.3%, the highest level since 2007.
Even if a recession can be averted, economists say it is almost inevitable that the Fed will have to inflict some pain, probably in the form of higher unemployment, such as the price of defeating chronically high inflation.
Inflation has peaked at voter concerns in the months leading up to the midterm elections in Congress, worsening the public’s view of the economy, weakening President Joe Biden’s approval ratings and increasing the likelihood of losses. Democrats in November. Biden has tried to show that he recognizes the pain that inflation is causing in American households, but has struggled to find political actions that can make a real difference. The president has stressed his belief that the power to curb inflation lies primarily with the Fed.
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However, the Fed’s rate hikes are strong tools to try to reduce inflation while maintaining growth. Oil, gas and food shortages are driving up inflation. The Fed is not ideal for addressing many of the roots of inflation, which include the invasion of Ukraine by Russia, the still-blocked global supply chains, the shortage of labor, and the growing demand for services. from plane tickets to restaurant meals.
The Fed’s expectations of higher rises have sent a series of interest rates to their highest points in years. The yield on the 2-year Treasury bond, a benchmark for corporate bonds, has reached 3.3%, its highest level since 2007. The 10-year Treasury yield, which directly affects mortgage rates, has reached 3.4%, almost half more. point since last week and the highest level since 2011.
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Investments around the world, from bonds to bitcoins, have fallen in recent months due to fears about high inflation and the possibility of the Fed’s aggressive push to control it causing a recession. Even if the Fed handles the tricky trick of curbing inflation without causing a recession, higher rates, however, will put pressure on stock prices. The S&P 500 has already sunk more than 20% this year, meeting the definition of a bear market.
Other central banks around the world are also acting swiftly to try to stifle rising inflation, even with their countries at greater risk of recession than the US. The European Central Bank is expected to raise rates by a quarter of a point in July, its first increase in 11 years. It could herald a larger rise in September if record inflation levels persist. On Wednesday, the ECB pledged to create market support that could protect member countries from financial turmoil of the kind that erupted during a debt crisis more than a decade ago.
The Bank of England has raised rates four times since December to a 13-year high, despite forecasts that economic growth will remain unchanged in the second quarter. The BOE will hold an interest rate meeting on Thursday.
The 19 countries of the European Union that use the euro currency suffered a record inflation of 8.1% last month. The UK hit a 40-year high of 9% in April. While debt service costs remain limited for now, rising borrowing costs from borrowing governments threatened the eurozone with a break in the first half of the last decade.
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Last week, the World Bank warned of the threat of “stagflation” – slow growth accompanied by high inflation – worldwide.
A key reason why a recession is now more likely is that economists are increasingly believing that for the Fed to curb inflation to its 2% target, it will have to drastically reduce consumer spending, earnings and growth. economic. Ultimately, it is almost certain that the unemployment rate will have to rise, which the Fed has not yet forecast, but which could be released on Wednesday in the updated economic projections.
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