The Federal Reserve announced it would raise interest rates by 0.75 percentage points, the highest rate since the start of 2008.
The bank hopes the increased cost of borrowing will cool the economy and reduce price inflation.
But critics fear the moves could trigger a serious downturn.
The latest hike takes the bank’s key rate to 3.75% to 4%, a range that is the highest since January 2008.
Federal Reserve Chairman Jerome Powell warned that interest rates were likely to rise again, saying speculation that the bank might take a break was “premature”. “We still have a long way to go,” he said at a press conference following the announcement.
US stocks come at a time when many other countries are also raising rates in response to their own inflation woes.
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In the UK, the Bank of England started raising rates last year but has so far opted for lower rate hikes than the Fed. The Bank of England is expected to announce its 0.75 percentage point hike on Thursday, the biggest move of its kind since 1989. Soaring borrowing costs have already started to cool some sectors of the economy, such as housing.
“keep the direction”
However, many economists say a further economic downturn is needed for inflation to return to what is considered a healthy level of 2%.
“There is always hope for painless and seamless disinflation,” said economist Willem Buiter, a former member of the Bank of England’s monetary policy committee turned independent economic adviser. “Unfortunately, there are very few historical episodes that fit this picture.”
“It will not be a pleasant year,” he added. Inflation – the rate at which prices rise – hit 8.2% in the United States last month. That’s down from June, when it rose to 9.1%, the highest rate since 1981.
A drop in energy prices has helped ease the pressure, but the cost of groceries, medical bills, and more continues to rise.
This adds hundreds of dollars to the monthly expenses of typical households because wages – although rising – have not kept pace.
Mr. Powell said restoring price stability was key to maintaining a healthy economy and said he had seen few signs so far that price pressures were steadily easing. While it’s still unclear how much interest rates will eventually have to rise, Powell said they’re likely to be higher than bank policymakers had previously expected.
“We will stay the course until the job is done,” he said.
Risk of policy failure
By raising interest rates, the bank makes borrowing more expensive, making people less likely to spend on big-ticket items like houses, and cars, or expanding their business. This drop in demand should dampen the rise in prices.
In a statement after the meeting, Fed policymakers said they were aware there would be a delay before the economy felt the full impact of their policies and pledged to factor this into their decision-making. of decision. Stock markets jumped, interpreting the news as a sign that rate hikes could slow or even pause in the coming months. But they swung again at the press conference after Mr Powell appeared eager to counter those expectations.
“Little has changed and it looks like the markets are looking for obvious accommodative reasons to rise,” said Charles Hepworth, a chief investment officer of GAM Investments. “We don’t expect a turning point just yet, but the ‘2023’ break is obviously not far off.”
The Fed was able to act relatively quickly compared to the UK, where the Bank of England faces more immediate recession risk as well as financial instability risks, said economist Ryan Sweet. Chief American at Oxford Economics. But, Mr. Sweet warned, “the risk of policy failure is very, very high around the world because central banks want to get inflation under control and they will do whatever it takes to bring it down.”
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Analysis box by Michelle Fleury, Business Editor for North America
Fed Chairman Jay Powell has been widely criticized for being too slow to react to inflation when it first surfaced in 2020.
Nobody can deny that he is going fast now.
Four 0.75 percentage point hikes in a row are lightning fast in the world of monetary policy. As Mr. Powell alluded to at his press conference, none of his predecessors – from Alan Greenspan to Ben Bernanke to current US Treasury Secretary Janet Yellen – had to raise rates so quickly…
But as the race against inflation rages on, the question for all is: will Mr. Powell and his colleagues at the FOMC really keep up the pace? As he said at the press conference: There is still a lot to do. It looks like another rate hike in December.
But in its statement, for the first time in this tightening cycle, the Fed explicitly acknowledged that at some point it will be justified to slow the pace as it takes a long time for the effect of rate hikes to manifest itself in economic data.
So, for now, the ferocious pace of rate hikes continues. Although, for those who pay close attention, there are one or two signs that Jerome Powell’s fast-moving Fed may be slowing down soon.
