After having increased its benchmark interest rate by further three-quarters of a percentage point (0.75%) on July 27, the US Federal Reserve (Fed) has signalled further rate hikes and slow pace of monetary tightening.
Fed’s Federal Open Market Committee (FOMC) may impose another rate hike when it meets towards the last week of September. Fed chairman Jerome Powell noted at a recent news conference that another 0.75 percentage point rise in September “could be appropriate.”
He, however, said future hikes would be guided by data, clearly indicating the US central bank would slow the pace of monetary tightening.
The Federal Reserve enacted its second consecutive 0.75 percentage point interest rate increase last week as it seeks to tamp down runaway inflation without creating a recession.
The US central bank has been raising borrowing costs since March to try to cool the economy and ease price inflation.
With inflation soaring, central banks “don’t really have a choice” but to increase interest rates, said economist Pierre-Olivier Gourinchas, director of research at the International Monetary Fund.
Higher interest rates help to fight inflation by raising the cost of borrowing, encouraging people and businesses to borrow less and spend less. In theory that is meant to lead to lower demand and slow price rises – but it also means less economic activity.
But fears are rising the moves will tip the US into recession, according to BBC.
Recent reports have shown falling consumer confidence, a slowing housing market, jobless claims rising and the first contraction in business activity since 2020.
Many expect official figures this week will show the US economy shrank for the second quarter in a row.
In many countries, that milestone is considered a recession though it is measured differently in the US.
In taking the benchmark overnight borrowing rate up to a range of 2.25%-2.5%, the moves in June and July represent the most stringent consecutive action since the Fed began using the overnight funds rate as the principal tool of monetary policy in the early 1990s.
While the fed funds rate most directly impacts what banks charge each other for short-term loans, it feeds into a multitude of consumer products such as adjustable mortgages, auto loans and credit cards. The increase takes the funds rate to its highest level since December 2018.
Powell acknowledged that parts of the economy were slowing, but said the bank was likely to keep raising interest rates in the months ahead despite the risks, pointing to inflation that is running at a 40-year high.
“Nothing works in the economy without price stability,” he said. “We need to see inflation coming down...That’s not something we can avoid doing,” Powell said.
Inflation in the US rose to 9.1% last month, driven by higher prices for gasoline, food and shelter. That is well above the Fed’s 2% target – and the fastest rate since 1981.
Many economists, however, believe the record high inflation is expected to moderate with the drop in energy and other commodity prices.
