In the face of persistent inflation in the United States, the US Federal Reserve (Fed) hit hard on Wednesday with another significant hike in interest rates and will not hesitate to continue on this path to curb inflation, its President warned.
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The Fed’s Monetary Affairs Committee (FOMC) hiked interest rates by three-quarters of a percentage point. These are now between 2.25% and 2.50%.
“Inflation is way too high,” said Fed Chair Jerome Powell, acknowledging that the latest inflation barometer came in at 9.1% “even worse than Fed members expected.”
This is the fourth consecutive increase: a quarter point in March, half a point in May and three quarters of a point in June – the largest increase since 1994.
And “the Monetary Committee believes that further rate hikes will be appropriate,” the Fed commented in a press release.
Mr Powell even hinted that another “unusually large” hike may be required at the next currency meeting in September.
The decision was taken unanimously by the twelve voting members. The Monetary Committee was full for the first time since 2013, with no vacant seats.
The Fed, which normally operates with quarter-point hikes, proceeded with another sharp hike to stem inflation, which hit a new high in more than 40 years at 9.1% year-on-year in June.
The aim of these interest rate hikes is to make credit more expensive in order to curb consumption and investment and ultimately reduce price pressure.
Policy rates were urgently cut to 0-0.25% in March 2020 to support the economy amid the COVID-19 crisis and remained in that range until last March.
“Recent spending and production indicators have slowed down,” says the Fed, referring specifically to consumption, the engine of the American economy.
“However, job creation has remained robust in recent months and the unemployment rate is still low,” also comments the FOMC, which reiterates that it is “very vigilant about inflationary risks”.
The Fed is hoping for a “soft landing” but the long-awaited economic slowdown could prove too severe to drive prices lower, weighing on jobs and even pushing the world’s largest economy into recession.
“We’re not trying to create a recession,” the Fed chair defended, assuring that the United States is not currently in a recession. “We believe there is a way to bring down inflation while supporting a strong labor market,” he said.
However, the IMF is less optimistic. “The current environment suggests that the United States is unlikely to emerge from recession,” warned its chief economist Pierre-Olivier Gourinchas on Tuesday.
After many financial authorities, the European Central Bank (ECB) has also begun to tighten its monetary policy. The IMF on Tuesday said it was important that these institutions continue to fight inflation.
This, of course, will not be without its difficulties and “tightening monetary policy will inevitably have economic costs, but any delay will only compound them,” according to the IMF.
The institute sharply lowered its growth forecast for the United States in 2022 and now expects just 2.3%.
Gross domestic product (GDP) growth for the second quarter will be released on Thursday. After a negative first quarter (-1.6%), it should be slightly positive.
But the risk of a recession continues to weigh on the world’s largest economy.
The actual definition of recession is debated in the country.
Is that two consecutive quarters of decline in gross domestic product (GDP)? Or a broader deterioration in economic indicators?
The controversy is likely to continue as November’s midterm elections draw closer.