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US Fed hikes interest rate to highest level since 2008 | Business and Economy News


Intensifying the fight against chronically high inflation, the United States Federal Reserve raised its benchmark interest rate by three-quarters of a point for the third time in a row, a positive pace that raises the risk of an eventual recession.

The Fed’s move on Wednesday raised the benchmark short-term interest rate, which affects many consumer and business loans, to about 3% to 3.25%, the highest level since early 2008.

Policymakers also signaled that, by early 2023, they expected more rate increase much higher than predicted in June.

The central bank’s action follows a government report last week that showed high costs were more widespread in the economy, with increases in rents and other services worsening despite some action. previous force inflationarysuch as the price of gasoline, has decreased.

By raising borrowing rates, the Fed makes it more expensive to get a mortgage or to buy a car or business. Then, consumers and businesses are expected to borrow and spend less, helping to cool the economy and slow inflation.

Fed officials said they were looking for a “soft landing,” that way they would manage to slow growth enough to tame inflation but not so much to trigger a recession.

However, economists are increasingly saying that they think a high rate hike by the Fed will lead to job cuts, which increase over time. unemployment and a full-blown recession later this year or early next year.

Chair Jerome Powell admitted in a speech last month that the Fed’s moves would “bring some pain” to households and businesses. And he added that the central bank’s commitment to bring inflation back to its 2% target was “unconditional”.

Lower gasoline prices have moderated headline inflation, which remained at 8.3% in August from a year earlier. Refuse gasoline prices may have contributed to the recent surge in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.

Short-term interest rates at the level the Fed currently envisions will make Depression more likely next year by sharply increasing the cost of mortgages, auto loans and business loans.

The economy hasn’t seen interest rates as high as the Fed expected since before the 2008 financial crisis. Last week, the average fixed mortgage rate hit 6%, its highest level in history. 14 years. According to Bankrate.com, the cost of borrowing with a credit card has reached its highest level since 1996.

Inflation now appears to be increasingly driven by higher wages and by consumers’ desire for steady spending and less by supply shortage weakened the economy during the pandemic.

However, on Sunday, Biden said on CBS’s “60 Minutes” news program that he believes the economy can still land lightly, suggesting that his recent energy and healthcare legislation His administration will reduce the prices of pharmaceuticals and healthcare.

Some economists began to express concern that the Fed quickly rate increase – the fastest since the early 1980s – will cause more economic damage than is needed to tame inflation.

Mike Konczal, an economist at the Roosevelt Institute, notes that the economy is slowing and that wage growth – a key driver of inflation – is faltering and by some measures even slowing slightly.

Surveys also show that Americans are waiting Inflation will decrease significantly in the next 5 years.

It’s an important trend because inflation expectations can be self-fulfilling: If people expect inflation to ease, some will feel less pressure to accelerate their purchases. Then, spending less will help increase prices moderately.

Konczal said there is a case for the Fed to slow down its rate hikes in the next two meetings. “With the coolness coming,” he said, “you don’t want to rush into this.”

The Fed’s rapid rate hike reflects steps other major central banks are taking, contributing to fears of a potential global recession.

The European Central Bank last week increased its benchmark rate by 3/4 percentage points. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all carried out massive rate hikes in recent weeks.

And in China, the world’s second-largest economy, growth has been hit by repeated government COVID lockdown. If a recession sweeps through most major economies, that could also derail the US economy.



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