On Wednesday, the US Federal Reserve raised its benchmark interest rate again by three-quarters of a percentage point in its ongoing fight to curb price pressures that are squeezing American families.
It was the second straight hike of 0.75 percent, or 75 basis points, and the fourth rate hike this year as U.S. central banks move aggressively to cool the sharpest rise in inflation in more than four decades, without derailing the world’s largest economy.
While the Fed noted signs that the US economy is slowing, it signaled plans to continue raising borrowing costs.
President Joe Biden is facing a political backlash over rising prices, which he has largely blamed on Russia’s invasion of Ukraine for driving up global food and energy prices.
Biden insists the US economy will avoid a recession, but even as his approval ratings have dipped, he has backed the Fed in its battle to quell inflation.
Fed Chairman Jerome Powell and others have made it clear that they are willing to risk a recession and will keep raising interest rates until they see strong evidence that inflation is moving back toward the two-by-two target. one hundred.
In a vote that was unanimous, unlike the decision taken in June, the policy-setting Federal Open Market Committee (FOMC) raised the policy lending rate to a range of 2.25 to 2.5 percent , after starting the year close to zero.
“Recent indicators of spending and output have softened,” the FOMC statement said.
But “inflation remains elevated, reflecting pandemic-related supply and demand imbalances, higher food and energy prices and broader price pressures,” the statement said, adding that he expects ongoing rate increases “will be appropriate.”
Economists say this has been the most aggressive Fed tightening cycle since the 1980s, when stagnation — a spiraling wage-price spiral and stagnant growth — crippled the US economy.
The challenge for policymakers is to quell inflation before it becomes dangerously entrenched without sending the world’s largest economy into a recession that would reverberate around the world.
Powell has argued that the U.S. economy is on solid footing and able to withstand rate hikes, with Wednesday’s statement noting that “job gains have been robust in recent months and the rate of unemployment has remained low.”
But the FOMC also made clear that it is “strongly committed to returning inflation to its two percent target” and is prepared to do more if that target is threatened.
Recession risk
Policymakers seemed to recognize that some factors are beyond their control. “Russia’s war against Ukraine is causing enormous human and economic hardship. The war and related events are creating additional upward pressure on inflation and weighing on global economic activity,” the statement said.
While prices have continued to rise, with home prices reaching a new record high, rising mortgage rates have slowed home sales for five consecutive months.
But global oil prices are trending lower, with US benchmark WTI falling below US$95 (A$136) a barrel from a high of more than US$123 (A$176 ) a barrel in March, and gas prices at the pump have fallen more than 70 cents from a record high of just over US$5 (A$7.15) a gallon in mid-June.
Meanwhile, the labor market has remained strong and surveys show that inflation expectations in the coming months have started to ease.
Policymakers want to engineer a “soft landing,” taming inflation without triggering a slowdown, but economists warn they face an increasingly narrow path to success and it would be easy to overshoot if too aggressive .
First quarter GDP shrank 1.6% and the first reading for the April-June period is due on Thursday.
While the consensus forecast calls for modest growth, many economists expect a slowdown.
Two quarters of negative growth is generally considered a sign that the economy is in recession, although this is not the official criterion.
“The Fed is now stuck between a rock and a hard place, with no easy way out without the economy feeling pain,” KPMG chief economist Diane Swonk said in an analysis, noting that “Powell has begun to underline this reality by admitting a recession. could happen.”
“Get ready,” Swonk said on Twitter, comparing rising inflation to a cancer that will spread if left untreated.
He said the benchmark interest rate will likely need to rise to a range of 3.75-4.0 percent, which would mean an increase of another 150 basis points in the coming months.