The U.S. Federal Reserve has stepped up its momentum to control high inflation by raising its key interest rate by three-quarters of a point, its biggest rise in nearly three decades.
He indicated that larger rate hikes that had occurred would increase the risk of another recession.
The move the Fed announced after its last policy meeting on Wednesday afternoon (Thursday morning AEST) will raise its short-term benchmark rate, which affects many consumer and business loans, to a range of 1.5% to 1.75%.
FILE – 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. (Photo AP / Alex Brandon, file) (AP)
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 percent 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 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 against Ukraine and its effects on energy prices.
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, compared to only 3% at 30 years. the beginning of the year.
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.
Australia’s central bank, the RBA, is expected to raise interest rates later this year. (AAP)
The president has stressed his belief that the power to curb inflation lies primarily with the Fed.
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.
Investments around the world, from bonds to Bitcoin, have fallen in recent months due to fears about high inflation and the prospect 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 plunged more than 20 percent 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.
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The Reserve Bank raised interest rates by half a percentage point earlier this month, also a bigger jump than expected.
Last week, the World Bank warned of the threat of “stagflation” – slow growth accompanied by high inflation – worldwide.