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In the US, another huge Fed rate hike of 75 basis points to curb inflation

In the US, another huge Fed rate hike of 75 basis points to curb inflation

The Federal Reserve said further hikes were being made as part of a fight to rein in rising prices. (file)

Washington:

The Federal Reserve on Wednesday raised another sharp rise in the key US interest rate and said more hikes were coming as part of a fight to rein in rising prices – an aggressive stance that raised fears of a recession. And Federal Reserve Chairman Jerome Powell warned that there would be some pain in the process of conquering the highest inflation in 40 years.

It was the third consecutive increase of 0.75 percentage points by the Fed’s policy-making Federal Open Market Committee (FOMC), which continued the coercive action this year, adding five hikes.

The increase takes the policy rate to 3.0-3.25 percent, and the FOMC said it anticipates that “ongoing growth … would be reasonable.”

Rising prices are straining American families and businesses, and have become a political liability for President Joe Biden as he faces midterm congressional elections in early November.

But the contraction of the world’s largest economy would be a more damaging blow to Biden and the world as a whole.

Powell has made it clear that officials will continue to act aggressively to cool the economy and avoid the 1970s and early 1980s the last time US inflation spiraled out of control.

It took drastic action in the 1980s to finally bring prices down — and the recession — and the Fed is unwilling to give up its hard-won, inflation-fighting credibility.

Amid criticism the Fed waited too long to proceed, Powell said the US central bank is committed to raising interest rates and keeping them high until inflation comes down, and he warned against reversing course too soon. .

“The historical record strongly warns against premature lax policy,” Powell told reporters.

He said there is no room for complacency and the Fed “will keep it until the job is done”, although at some point it would be appropriate to slow down the pace of rate hikes based on the data.

pain

He acknowledged that bringing inflation down would require a period of slow growth and high unemployment, noting that the job market is out of sync, with far more openings than workers.

“We have to get inflation behind us. I wish there was a painless way to do this. It doesn’t.”

But he said continued high inflation would be even more painful, especially for those least able to withstand it.

KPMG economist Diane Swonk said that Powell has “stopped sugar-coating” what the fight to contain inflation would be: “Growth will weaken and the unemployment rate will rise.”

The Fed’s quarterly forecasts, released along with the rate decision on Wednesday, show that FOMC members expect US GDP growth to pick up about 0.2 percent this year. But they see a return to expansion in 2023 with annual growth of 1.2 percent.

They forecast more rate hikes this year – a total of 1.25 percentage points – and more in 2023, with no cuts until 2024.

While the FOMC has noted “strong” job gains and low unemployment in recent months, forecasters forecast the unemployment rate to rise to 4.4 percent next year and remain around that level through 2025, up from 3.7 percent in August.

Inflation is a global phenomenon amid the Russian war in Ukraine and the Covid lockdown in China at the top of the global supply chain, and other major central banks are also taking action.

Despite a welcome drop in petrol prices at the pumps in recent weeks, the disappointing consumer price report for August showed widespread growth.

The FOMC statement noted “widespread price pressures” beyond food and energy, and stressed that officials are “strongly committed to returning inflation to its 2 percent objective.”

Raising rates raises borrowing costs and cold demand, and it’s having an effect: the housing market has slowed as mortgage rates rise.

Many economists say at least a short period of negative US GDP will be needed in the first half of 2023 before inflation subsides.

Nancy Vanden Houten of Oxford Economics said the updated Fed forecast acknowledged “the impact of higher rates on the economy”, but added that “their estimates are more optimistic than our own.”

Stocks on Wall Street turned negative after the announcement and ended the day with huge losses, with all three major indices falling at least 1.7 percent.

Meanwhile, the US dollar hit a 20-year high.

(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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