The US Federal Reserve has intensified its drive to tame high inflation by raising its key interest rate by three-quarters of a point – its largest hike in nearly three decades – and signalling more large rate increases to come that would raise the risk of another recession.
The move the US central bank announced after its latest policy meeting on Wednesday will increase its benchmark short-term rate, which affects many consumer and business loans, to a range of 1.50 per cent to 1.75 per cent.
The central bank is ramping up its drive to tighten credit and slow growth with inflation having reached a four-decade high of 8.6 per cent, spreading to more areas of the economy and showing no sign of slowing.
People in the US are also starting to expect high inflation to last longer than they had before.
This sentiment could embed an inflationary psychology in the economy that would make it harder to bring inflation back to the Fed’s 2 per cent target.
The Fed’s 0.75 basis points increase exceeds the half-point hike that chair Jerome Powell had previously suggested was likely to be announced this week.
The decision to impose a rate hike as large as the Fed did on Wednesday (local time) is an acknowledgement that it is struggling to curb the pace and persistence of inflation, which has been worsened by Russia’s war against Ukraine and its effects on energy prices.
Borrowing costs have already risen sharply across much of the US economy in response to the Fed’s moves, with the average 30-year fixed mortgage rate topping 6 per cent, its highest level since before the 2008 financial crisis. It is up from just 3 per cent at the start of the year.
The yield on the two-year Treasury note, a benchmark for corporate borrowing, has jumped to 3.3 per cent, its highest level since 2007.
Even if a recession can be avoided, economists say it is almost inevitable that the Fed will have to inflict some pain – most likely in the form of higher unemployment – as the price of defeating chronically high inflation.
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