The United States will continue its vigorous campaign of monetary tightening to combat inflation-driven cost-of-living issues, with economic pain certain to ensue.
The US central bank has raised interest rates for the fourth time in a row.
The Federal Reserve, also known as the Fed, has once again increased interest rates by 0.75 percentage points to combat surging inflation.
The widely anticipated increase will make borrowing more expensive for mortgage and credit card debt holders.
Since the latest hike in September, American interest rates have increased from 3% to 3.25% to 3.75 to 4%.
The most recent harsh approach has been adopted to curb spiraling inflation, which reached 8.2% in the United States in the 12 months preceding September. The increases are part of a larger strategy to lower inflation to 2%.
This objective will be pursued relentlessly, as the committee that determines US interest rates predicted “further hikes” in rates will be suitable “for some years.
The Fed has assumed responsibility for inflation; speaking at the announcement, Fed head Jay Powell stated that price stability is his organization’s responsibility and the foundation of the economy. “Without price stability, the economy cannot function,” he explained.
It remains to be seen how high these rates will go. Mr. Powell noted that there is “substantial uncertainty” over the rate of interest rate hikes, although it is anticipated that rates will be higher than anticipated.
The rate of the interest rate increase will be determined by indicators of public health, labor market circumstances, inflation, and financial and international trends.
Mr. Powell noted that the longer the current high rate of inflation persists, the higher the likelihood that inflation expectations will become entrenched.
Now is not the time to evaluate when interest rate hikes may moderate, he said, because continued rate increases are required to reach a “sufficiently restrictive” level.
According to analysts, these rate hikes are already hurting the economy.
Rakeen Mabud, chief economist and managing director of policy and research at the Groundwork Collaborative, remarked, “A Fed-induced recession is still a very real and perilous potential.”
“The downturn in the housing market is the canary in the coal mine – a warning of the true cost we will all pay if Chair Powell continues his interest rate binge.”
The United Nations Conference on Trade and Development (UNCTAD) had warned that a recession worse than the one suffered following the global financial crisis might result if interest rates continue to climb.
Beginning the year at a rate of 0%, the Fed has gradually lifted the rate over the course of five announcements. During the pandemic, when the Fed wanted businesses and people to remain financially solvent, it set a low-interest rate.
The Fed has not engaged in such a vigorous campaign of monetary tightening since the early 1980s, with Mr. Powell calling Wednesday’s rate hikes “historically rapid.”
Before Wednesday’s move, the Fed had previously raised interest rates in September, June, and July at levels not seen since 1994.
As inflationary pressures cause cost-of-living crises throughout countries, the Fed is merely one of many central banks focusing on interest rates.
On Thursday, the Bank of England is expected to increase its basic interest rate by 0.75 percentage points to 3 percent.
