The Federal Reserve of the United States has done this Wednesday, June 15, something not seen in three decades: it has increased its short-term reference interest rate by three quarters of a percentage point, to a range between 1.5% and 1, 75%. This is a higher increase than previously forecast by the central bank itself and is a full-fledged confirmation that the central bank is clamping down on runaway inflation, and in turn triggers a growing fear that a recession is looming. .
Federal Reserve Chairman Jerome Powell has warned that, given rising inflation, “there may be more surprises” in the immediate future.
According to Powell, these are “extraordinarily challenging” times, especially given that “high inflation means added difficulties for those who have it worse to pay for food or transport.” The Fed’s goal, Powell has said, is to return inflation to a “healthy” 2%.
Despite the strength of the US labor market, in an area considered to be at full employment (3.6%), the US financial authorities are deeply concerned about the galloping inflation, shot to its highest rise in 40 years, with an alarming 8.6% year-on-year in May.
The Fed has raised its short-term benchmark rate by that three-quarters of a percentage point, considerably more than the customary quarter-point hike and the earlier forecast of half a point. The benchmark rate has not been in this range now since before the coronavirus pandemic that began more than two years ago. That announcement came at the end of a two-day meeting of the Fed’s board of governors, after which Powell appeared.
In the corresponding statement, the Fed also attributes the need for this financial measure to the Russian invasion of Ukraine. “Russia’s invasion of Ukraine is causing tremendous human and economic hardship… The invasion and related events are creating additional upward pressure on inflation and weighing on global economic activity. Additionally, Covid-related lockdowns in China will likely exacerbate supply chain disruptions,” the central bank said.
Other central banks, including European ones, are moving quickly against rising prices, even at the risk of triggering recessions. In fact, next month, for the first time in more than a decade, the European Central Bank itself plans to raise rates by a quarter of a point, according to European media.
The US central bank is now causing the borrowing costs of US businesses and consumers to rise, which will lead to a drop in consumption, with the aim of lowering inflation, but with the probable consequence of forcing an economic slowdown, just when those fears of a full-blown recession intensify.
The previous US president, Donald Trump, put a lot of pressure on the Fed to lower rates when the pandemic hit. Powell relented and made the first cuts since 2008, which were crucial, though not the only factor, for the current era of high debt, high consumption and high inflation.
Additionally, in late April, the White House revealed that the US economy slowed in the first quarter of 2022. Gross Domestic Product shrank to an annual rate of 1.4% through March, a change from solid growth in the first quarter of 2021, which was 6.9%. Although it is true that a single quarter does not form a pattern of behavior, two consecutive periods of downward growth are a problem.
Powell and other members of the Fed board had pointed to consecutive increases of 50 basis points in May, something that their actions today deny. At his hearing in May, Powell himself openly dismissed the 75 basis point hike that has now occurred, saying “it’s not something the committee is actively considering.” Yesterday he said that the seriousness of inflation has forced him to rethink his predictions.
