The United States Federal Reserve is stepping up its fight against persistently high inflation, raising interest rates by three-quarters a point for the third straight month, an aggressive pace that increases the risk of an eventual recession. Is.
The Fed’s move on Wednesday raised its short-term interest rate, which affects many consumer and business loans, to a range of 3 percent to 3.25 percent, the highest level since early 2008.
Policymakers also indicated that by early 2023 they expect rate hikes to be far higher than expected in June.
The central bank’s actions followed a government report last week that showed higher costs were continuing to creep into the economy, accompanied by rising prices for rent and other services and some earlier levels of inflation. Drivers like gasoline prices have fallen.
By raising lending rates, the Fed makes it more expensive to get a mortgage, car loan, or business loan. Consumers and businesses may then borrow and spend less, cooling the economy and slowing inflation.
Fed officials have said they want a “soft landing” that will slow growth and curb inflation, but not so much as to trigger a recession.
However, economists are increasingly saying they believe the Fed’s sharp rate hike will, over time, lead to job cuts, rising unemployment and a full-blown recession later this year or early next.
Chairman Jerome Powell acknowledged in a speech last month that the Fed’s actions would cause “some pain” to households and businesses. And he said the central bank’s pledge to bring inflation back to its 2 percent target was “unconditional”.
The drop in gasoline prices has eased headline inflation, which was still a painful 8.3 percent year-on-year in August. The drop in gasoline prices may have contributed to the recent surge in the public approval rating of President Joe Biden, who Democrats hope will improve his chances in November’s midterm elections.
Short-term interest rates at the levels the Fed now envisages will make a recession likely next year by sharply increasing the cost of mortgages, auto loans and business loans.
The Fed has predicted that the economy has not seen interest rate hikes this high since the 2008 financial crisis. Last week, the average mortgage rate topped 6 percent, its highest level in 14 years. Credit card borrowing costs are at their highest since 1996, according to Bankrate.com.
Inflation is now being dampened by higher wages and stagnant consumer spending and supply constraints that have hit the economy during the pandemic.
On Sunday, however, Biden said on CBS’ 60 Minutes news program that he still thinks a soft landing is possible for the economy, suggesting his administration is grappling with recent energy and health concerns. The law would lower drug and healthcare prices.
Some economists are beginning to express concern that the Fed’s rapid rate hike – the fastest since the early 1980s – will do more economic damage than is needed to contain inflation.
Mike Konczl, an economist at the Roosevelt Institute, said the economy is already slowing and wage growth – a key inflation driver – is flattening and even declining slightly on some measures.
Polls also show that Americans expect inflation to fall significantly over the next five years.
This is an important trend because inflation expectations can be self-fulfilling: if people expect inflation to fall, some will feel less pressure to accelerate their purchases. Lower expenses will contribute to a small increase in prices.
Konczal said there were arguments for the Fed to slow rate hikes over the next two meetings. “With the chill coming,” he said, “you don’t want to rush it.”
The Fed’s sharp rate hike mirrors moves being taken by other major central banks and is adding to concerns about a possible global recession.
The European Central Bank raised its key interest rate by three quarters of a percent last week. The Bank of England, Reserve Bank of Australia and Bank of Canada have all hiked interest rates sharply in recent weeks.
And in China, the world’s second largest economy, growth is already suffering from repeated government COVID lockdowns. If most major economies fall into recession, it could derail the US economy as well.
First appearing on Al Jazeera after the US Federal Reserve hiked interest rates to their highest level since 2008.