The US central bank expects further rate hikes and signals the possibility of a slower pace. (Photo: 123RF)
WASHINGTON — The U.S. Federal Reserve raised rates to the highest level in nearly 15 years on Wednesday and plans to raise them further as it tries to contain high inflation at all costs, a task complicated by the threat of a recession.
The increase is expected to place the key rate between 3.75% and 4.00%. This is the highest level since January 2008.
And institution officials say they expect “further rate increases to be appropriate,” according to a news release issued after two days of talks.
However, they indicate that the economic impact of increases from as early as March will need to be taken into account when determining the pace of increases to be decided at future meetings. This could signal slower growth in the coming months.
It takes months for these Fed decisions to affect the economy.
That left inflation still at 6.2% over the year in September, close to the highest levels in more than 40 years, according to the Fed’s preferred PCE index, which aims to bring it back to 2%.
Another indicator, the CPI index, which mainly refers to the valorization of pensions, showed an increase in prices by 8.2% in one year in September.
Wednesday’s hike in key interest rates is the sixth in a row since March, when it hovered between 0.00 and 0.25 percent, the lowest level to support economic consumption during the COVID-19 crisis. 19. The Fed started with the usual increase of 0.25 points, then accelerated to 0.50 and finally, four times now, 0.75 points.
With less than a week to go before the midterm elections in which President Joe Biden risks losing his slim Democratic majority in Congress, inflation is now a top concern for American households.
But there is another danger, as this voluntary slowdown in activity risks plunging the US economy into recession in 2023.
“First signs” of a slowdown
Jerome Powell warned at the end of the last meeting in September that there is no “painless way” to fight inflation in the long term.
Meanwhile, the United States posted quarterly growth between July and September, with GDP growing at a +2.6% annualized rate.
When it comes to the job market, it still shows iron health. Official figures for October will be released on Friday, but we already know that private employers added 239,000 jobs in October, much more than in September and much more than expected, according to data released on Wednesday.
“While we’re seeing early signs of a Fed-induced slowdown in (labor) demand, it’s only impacting certain sectors of the labor market,” ADP chief economist Nela Richardson said in a news release.
Democrats, who campaigned on abortion rights while Republicans played the anti-inflation card, are now trying to push their economic agenda to benefit the middle classes.
Democratic Sen. Sherrod Brown, chairman of the Senate Banking Committee, sent a letter to Jerome Powell in late October stressing that “the Fed’s fight against inflation should not hurt workers.”
The powerful institution’s credibility is at stake because, after months of ensuring high inflation would only be temporary, it has so far failed to slow it down.
However, the more households count on a permanent rise in prices, the more they behave accordingly and the more it becomes entrenched. This then requires even more painful measures, as in the early 1980s, after years of inflation sometimes approaching 15%.