US Federal Reserve raises interest rates

Stepping up its fight against high inflation, the Federal Reserve raised its key rate by a substantial three-quarters of a point for a third consecutive time and announced further rate hikes to come. This is an aggressive pace that will increase the risk of a possible recession.

The Fed’s decision raised its benchmark short-term rate, which affects many consumer and business loans to a range of 3% to 3.25%, the highest level since early 2008.

Officials also forecast that they will raise their policy rate further to around 4.4% by the end of the year, one point higher than they had envisaged last June. And they expect to raise the rate again next year, to around 4.6%. It would be the highest level since 2007.

By raising borrowing rates, the Fed makes it more expensive to take out a mortgage or business loan. Consumers and businesses then borrow and spend less, which cools the economy and slows inflation.

Falling gasoline prices slightly lowered headline inflation, which was still a painful 8.3% in August from a year earlier. That drop in gas pump prices may have contributed to a recent surge in President Joe Biden’s approval ratings that Democrats hope will improve their prospects in November’s midterm elections.

Speaking at a press conference, Federal Reserve Chairman Jerome Powell said that before Fed officials consider halting their rate hikes, they “would like to be very confident that inflation is coming back down” to their target of 2%. I have noticed that the strength of the labor market fuels wage gains that contribute to higher inflation.

And he underscored his belief that controlling inflation is key to ensuring the long-term health of the labor market.

“If we want to pave the way for another period of very strong labor markets,” Powell said, “we have to put inflation behind us. I wish there was a painless way to do that. ‘there is not any.

Fed officials said they were looking for a “soft landing”, whereby they would manage to slow growth enough to bring inflation under control, but not so much as to trigger a recession. Yet most economists are skeptical. They say they believe the Fed’s steep rate hikes will, over time, lead to job cuts, rising unemployment and a broad-based recession later this year or early next year. .