September 25, 2022
US Federal Reserve hikes key interest rate amid fears of recession

US Federal Reserve hikes key interest rate amid fears of recession

Rising prices are putting pressure on American households. (Representative)


The Federal Reserve raised the key US interest rate again on Wednesday and said more hikes were on the way as it battles rising prices – an aggressive stance that has raised fears of a recession.

It was the third consecutive increase of 0.75 percentage points by the Fed’s policy-making Federal Open Market Committee (FOMC), which continues coercive action to reduce inflation that has risen to the highest level in 40 years.

The increase takes the policy rate to 3.0-3.25 percent, and the FOMC said it “expects that ongoing growth … will 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, to the credibility of the Fed, and to 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 avoid the last time US inflation spiraled out of control in the 1970s and early 1980s.

Hard action – and a recession – finally took place in the 1980s to bring prices down, and the Fed is unwilling to give up its hard-won, inflation-fighting credibility.

The Fed’s quarterly forecasts, released along with the rate decision on Wednesday, suggest FOMC members expect a sharp slowdown this year with US GDP growth of just 0.2 percent, but a return to expansion in 2023 with annual growth of 1.2 percent.

Powell’s press conference after the meeting will be closely scrutinized to see how much more the Fed will have to do before declaring victory in the inflation battle.

FOMC members have seen further hikes in rates this year and next, with no cuts until 2024.

doubt, pressure

KPMG economist Diane Swonk warned that the central bank would come under increasing pressure, especially if unemployment began to rise, and that Fed officials would “become a political pinata.”

While the FOMC has noted continued “strong” job gains and low unemployment in recent months, forecasters project the unemployment rate to rise to 4.4 percent next year and remain around that level until 2025.

Powell and other central bankers are sending the same message: An economic downturn is better than sustained high inflation, which will inflict pain, especially on those least able to withstand it.

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.

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

Despite a welcome drop in petrol prices at petrol 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 bringing inflation back to its 2 percent objective.”

The Fed has stepped up its rate hikes, including two straight three-quarter-point hikes in June and July, cranking the benchmark lending rate four times this year.

The aim is to raise borrowing costs and quell demand, and it is having an effect: the housing market has slowed as mortgage rates rise.

“The irony here is that just as the Fed is raising anti-inflation rhetoric to fever-pitch, the necessary forces are now in place to reduce inflation next year,” said Ian Shepherdson of Pantheon Macroeconomics.

US stocks turned negative after the announcement.

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

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