US Fed hikes interest rate to highest level since 2008

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The announcement raised concerns that the fight to contain skyrocketing US inflation could push the economy into recession.

Intensifying its fight against long-standing high inflation, the United States Federal Reserve has raised its key interest rate by three-quarters of a point for the third time in a row, an aggressive pace that is raising the risk of an eventual recession. Is.

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The Fed’s move on Wednesday raised its benchmark short-term 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 rates to be raised far higher than they expected in June.

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The central bank’s action followed a government report last week that showed higher costs were spreading more widely through the economy, accompanied by rising prices for rent and other services, as well as some previous levels of inflation. drivers, such as petrol prices have come down.

By raising lending rates, the Fed makes it expensive to take out a mortgage or car or business loan. Consumers and businesses then possibly borrow and spend less, cooling the economy and slowing inflation.

Fed officials have said they are seeking a “soft landing” by which they will manage to slow growth to moderate inflation, but not so much as to trigger a recession.

Yet economists increasingly say they think 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 year.

Chair Jerome Powell acknowledged in a speech last month that the Fed’s moves would “bring some pain” to homes and businesses. And he said the central bank’s commitment to bring inflation back to its 2 percent target was “unconditional”.

The fall in petrol prices has moderated headline inflation, which stood at a still painful 8.3 per cent in August compared to a year ago. The drop in gasoline prices may have contributed to the recent rise in President Joe Biden’s public approval rating, which Democrats hope will boost his chances in November’s midterm elections.

Short-term rates at the level the Fed is now envisioning will make a recession likely next year by sharply increasing the cost of mortgages, car loans and business loans.

The Fed has been predicting that the economy has not seen rates rise as high since before the 2008 financial crisis. Last week, the average term mortgage rate topped 6 percent, its highest point in 14 years. According to Bankrate.com, credit card borrowing costs have reached their highest level since 1996.

Inflation is now subdued by higher wages and stagnant consumers’ willingness to spend and supply constraints that hit the economy during the pandemic.

On Sunday, however, Biden said on CBS’s “60 Minutes” news program that he believes a soft landing for the economy is still possible, suggesting that his administration’s recent energy and health concerns. The law would lower prices for pharmaceuticals and healthcare.

Some economists are beginning to express concern that the Fed’s rapid rate hike – the fastest since the early 1980s – will cause more economic damage than is necessary to tame inflation.

Mike Konczl, an economist at the Roosevelt Institute, said the economy is already slowing and that wage growth – a key driver of inflation – is flattening out and slowing even slightly by some measures.

Surveys also show that Americans expect a significant reduction in inflation during the next five years.

This is an important trend because inflation expectations can be self-sustaining: if people expect inflation to moderate, some will feel less pressure to accelerate their purchases. Lower expenditure will help in marginal increase in prices.

Konczal said there is a case for the Fed to slow its rate hikes over the next two meetings. “Given the impending coolness,” he said, “you don’t want to rush it.”

The Fed’s sharp rate hike mirrors steps other major central banks are taking, contributing to concerns about a potential global recession.

The European Central Bank raised its benchmark rate by three-quarters of a percent last week. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all raised rates drastically in recent weeks.

And in China, the world’s second-largest economy, growth is already suffering from the government’s repeated COVID lockdowns. If most major economies go into recession, it could derail the US economy as well.

US Fed hikes interest rate to highest level since 2008

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