August 17, 2022

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Fed intervenes hard again: US interest rate hiked again to 0.75 percent

Fed intervenes hard again: US interest rate hiked again to 0.75 percent

Last June, the central bank also raised interest rates by 0.75 percent. The Fed has not raised interest rates this quickly since the early 1980s.

War in Ukraine

In a statement, the central bank said it was monitoring inflation very closely. Policymakers report that the war in Ukraine is fueling inflation and at the same time putting pressure on economic activity.

As a result, corporate and consumer spending has eased slightly, the central bank notes, but the labor market remains strong. The central bank thus indicates that there is room for another sharp hike.

Consensus decision

According to the interest rate, the prime interest rate is 2.25 to 2.5 percent. Unlike the previous step, the increase was unanimous. At the time, not a single policymaker believed such a large increase was needed.

Fed President Jerome Powell said subsequent rate hikes would be ‘appropriate’, with a new step of three-quarters of a percentage point not being ruled out. “It depends on the data,” Powell said.

Powell says the effects of previous rate hikes on the economy are not yet fully visible. If those effects are clear, the central bank will have enough for a small hike in September.

Powell noted that he is concerned about a strong labor market and the associated wage increases. Falling spending is only the beginning of a slowdown in growth that will ultimately lead to a less rapid rise in prices. “We believe the economy should grow at a slower pace.” This would solve supply problems and remove part of the cause of high inflation.

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Avoid stagnation

Recession is not the goal. Powell points out that it doesn’t make sense for the economy to shrink as jobs continue to be created. But the path to avoiding recession is narrowing, Powell said.

Also, according to the central bank chief, it is important to act strongly against high inflation, which is stable and seen as normal. “If we don’t act now, it will be expensive to do something later.”

Equity markets rarely react to rate hikes in line with expectations. The dollar fell slightly against the euro.