Washington : The Federal Reserve on Wednesday 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 signaling more large rate increases to come that would raise the risk of another recession.
The move the Fed announced after its latest policy meeting will increase its benchmark short-term rate, which affects many consumer and business loans, to a range of 1.5 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. Americans 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 three-quarter-point rate increase exceeds the half-point hike that Chair Jerome Powell had previously suggested was likely to be announced this week. The Fed's decision to impose a rate hike as large as it did Wednesday was an acknowledgment that it's 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 U.S. 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, up from just 3per cent at the start of the year. The yield on the 2-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's 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.
Clear signals
US central bankers began raising interest rates off zero in March as buoyant demand from American consumers for homes, cars and other goods clashed with transportation and supply chain snarls in parts of the world where Covid-19 remained -- and remains -- a challenge.
That fueled inflation, which got dramatically worse after Russia invaded Ukraine in late February and Western nations imposed steep sanctions on Moscow in response, sending food and fuel prices up at a blistering rate.
US gasoline prices have topped $5.00 a gallon for the first time ever and are setting new records daily.
Economists thought March was the peak for consumer price hikes, but the rate spiked again in May, jumping 8.6 percent in the latest 12 months, and wholesale prices surged as well, almost entirely due to soaring costs for energy, especially gasoline.
The Fed was caught off guard with the speed of the price increases, and while policymakers usually like to clearly signal any policy shift to financial markets, the latest data likely changed the calculus.
Powell had indicated policymakers were poised to implement another half-point increase in the benchmark borrowing rate this week and another next month, aiming to douse red-hot inflation without tipping the economy into recession and avoid a bout of 1970s-style stagflation.
"The 75bp hike... will be about making people/markets believe that they're serious about continuing to have higher rates in 2023," Furman said.
Markets are now pricing in at least one three-quarter-point hike by the end of the year and an aggressive path at the other four meetings.
Former New York Fed bank president William Dudley expects to see the super-sized increase.
"Fed officials are worried a bit about losing credibility," he said at an event hosted by The Wall Street Journal.
But neither the Fed nor the White House can have much immediate effect on many of the factors driving the price increases.
Biden on Tuesday blamed Russia for inflation, which is afflicting countries worldwide, and criticized Republicans for blocking his efforts to help American families feeling the pain.
Inflation is "sapping the strength of a lot of families," he told trade unions in Philadelphia. "Republicans in Congress are doing everything they can to stop my plans to bring down costs."
But neither the Fed nor the White House can have much immediate effect on many of the factors driving the price increases.
Biden on Tuesday blamed Russia for inflation, which is afflicting countries worldwide, and criticized Republicans for blocking his efforts to help American families feeling the pain.
Inflation is "sapping the strength of a lot of families," he told trade unions in Philadelphia. "Republicans in Congress are doing everything they can to stop my plans to bring down costs."
