In its third consecutive rate hike, the US Federal Reserve raised the key policy rate by 75 basis points to 3.0-3.25 percent, aiming to achieve maximum employment and long-term inflation of 2 percent. The central bank’s policy-making Federal Open Market Committee (FOMC) raised rates for the fifth time this year in a bid to cap inflation, which has risen to a 40-year high, news agency AFP reported.
The aggressive stance has raised concerns about a recession in the US, with Federal Reserve Chairman Jerome Powell warning that the process of controlling inflation will involve some pain.
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Powell also ensured that the authorities would continue to work hard to cool the economy, the last time inflation ran out of control in the 1970s and early 1980s.
The impact of rate hikes on the economy will be closely watched amid midterm congressional elections in early November. But a contraction of the world’s largest economy would do more damage to President Joe Biden and the world at large.
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US consumer inflation eased to 8.3 percent in August from 8.5 percent in July, but remained above the 2 percent target. Inflation has failed to ease as quickly in recent months as central bank officials had hoped.
In its latest projections, Reuters expects its policy rate to move faster and higher than expected, the economy to slow, and unemployment to rise to a level historically associated with recessions.
Projections have seen unemployment rise to 4.4 percent by the end of next year and 4.4 percent by the end of 2024 — up from 3.9 percent and 4.1 percent respectively in June projections.
Estimates for economic growth were cut to 1.2 percent in 2023 and 1.7 percent in 2024, reflecting the larger impact of tighter monetary policy.
Powell said the Fed is “intentionally moving our policy stance to a level that is sufficiently restrained to get inflation back to 2 percent.” It is noteworthy that the country’s economy is currently in a technological recession. Meanwhile, real gross domestic product (GDP) in the US continued to decline in the second quarter of 2022 (April-June).
A technical recession is defined as two consecutive quarters of negative growth in real GDP.