In a third consecutive rate hike, the US Federal Reserve has raised the key policy rate by 75 basis points to 3.0-3.25 per cent targeted to achieve maximum employment and inflation at the rate of 2 per cent over the long run. The Fed’s policy-setting Federal Open Market Committee (FOMC) raised the rates for the fifth time this year aiming to put a lid on inflation that has surged to its highest level in 40 years, according to news agency AFP.
The aggressive stance has also raised concerns of a recession in the US, with Federal Reserve Chairman Jerome Powell warning the process of taming inflation will involve some pain.
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Powell also ensured that officials will continue to act aggressively to cool the economy and avoid a repeat of the 1970s and early 1980s, the last time inflation went out of control.
The impact of the rate hike on the economy will be keenly watched amid the mid-term congressional elections in early November. But a contraction of the world’s largest economy would be a more damaging blow to President Joe Biden and the world at large.
Key points about US rate hike
Consumer inflation in the US declined marginally in August to 8.3 per cent from 8.5 per cent in July but is way above the 2 per cent goal. The inflation failed to come down as quickly in recent months as Fed officials had hoped.
In its latest projections, the Fed foresees its policy rate rising at a faster pace and to a higher level than expected, the economy slowing down, and unemployment rising to a degree historically associated with recessions, as per Reuters.
The forecasts showed unemployment rising to 4.4 per cent by the end of next year and the same at the end of 2024 — up from 3.9 per cent and 4.1 per cent, respectively, in the June projections.
The estimates for economic growth in 2023 were lowered to 1.2 per cent and 1.7per cent in 2024, reflecting a bigger impact from tighter monetary policy.
Powell added the central bank was moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 per cent. It is to be noted that the country’s economy is currently in a technical recession. Meanwhile, real gross domestic product (GDP) in the US declined consecutively for the second quarter of 2022 (April-June).
A technical recession is often defined as two consecutive quarters of negative growth in the real GDP.