The Federal Open Market Committee, which sets monetary policy at the Fed, raised interest rates by 0.75 percentage points for a third straight time (FOMC).
The Federal Reserve hiked its benchmark interest rate again on Wednesday, saying more increases are expected as it confronts rising prices. This strong attitude has stoked worries of a recession.
The Federal Reserve’s policymaking Federal Open Market Committee (FOMC) raised interest rates for a third straight time, this time by 0.75 percentage points, taking strong action to stem inflation that has risen to its highest level in 40 years.
The FOMC has stated that it “anticipates that continuing increases… will be appropriate,” bringing the new policy rate to 3.0–3.25 percent.
As President Joe Biden prepares for the midterm legislative elections in early November, soaring prices have become a political problem.
A worse blow to Biden, the Fed’s reputation, and the world at large would be a contraction of the world’s largest economy.
U.S. inflation last got out of hand in the 1970s and early 1980s, and since then, Federal Reserve Chair Jerome Powell has made it plain that the central bank will continue to take strong action to cool the economy and prevent a replay of those years.
The Fed is reluctant to give up its credibility in battling inflation because it required strong measures and a recession to eventually drive prices down in the 1980s.
The Fed’s quarterly predictions, revealed alongside the rate decision on Wednesday, show that FOMC members anticipate a significant downturn this year, with US GDP growth of only 0.2 percent, but a return to expansion in 2023, with annual growth of 1.2 percent.
Following the meeting, Powell will give a news conference, and his comments will be keenly examined for hints as to how much more the Fed will have to do before declaring victory in the fight against inflation.
Members of the FOMC anticipate more rate rises in 2019 and 2020, with no reductions expected until 2024.
Especially if unemployment rates start to climb, KPMG economist Diane Swonk said, “Fed officials will become political pinatas.”
Despite the FOMC’s positive assessment of recent job growth and low unemployment, the estimates predict that the rate will increase to 4.4% in 2019 and remain there until 2025.
Central bankers like Powell have been conveying a consistent message: a recession is preferable to high inflation because of the suffering it would cause, especially for the most vulnerable members of society.
Russian military intervention in Ukraine, along with disruptions in global supply chains and Covid lockdowns in China, have all contributed to a worldwide inflationary environment, prompting responses from other major central banks.
Many financial experts believe that negative GDP growth in the United States during the first half of 2023 is necessary before inflation can begin to decline.
Although recent weeks have seen gas prices reduce, overall rises were reported in the dismal consumer price index for August.
The FOMC statement acknowledged “broader pricing pressures” beyond food and energy, and reaffirmed a “strong commitment” to bringing inflation back down to the 2% target.
The Federal Reserve has increased its benchmark lending rate four times this year, with two consecutive increases of three-quarters of a percentage point in June and July.
As a result, the housing market has slowed as mortgage rates have risen, accomplishing the goal of increasing the cost of borrowing and reducing demand.
The dynamics needed to bring down inflation over the next year are already in place, according to Ian Shepherdson of Pantheon Macroeconomics, which is ironic since the Fed is ramping up its anti-inflation rhetoric.