The US Federal Reserve raised the benchmark interest rate by 75 basis points as grapples with runaway inflation. The move was expected in the backdrop of inflation rising to the highest level since the 1980s. In is policy meeting in June too, the US central bank had raised the benchmark rates by 75 basis points.
"The labor market is extremely tight, and inflation is too high ... Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low," Federal Reserve Chairman Jerome Powell said at a news conference.
More Rate Hikes
The Fed started the rate hikes in March after following a loose monetary policy for months in the wake of the Coronavirus pandemic and the economic shocks from the global crisis.
Analysts expect the US central bank to continue to tighten rates up until the end of the year, despite fears that this will push the US into recession. higher rates will cool off inflation by limiting spending and loan offtake. But a resultant cooling off of demand will push economic growth lower, threatening the onset of a recession.
Fed's Dilemma
The Fed is in a tight spot, between raging inflation and recessionary trends. Falling consumer confidence, increasing jobless claims and a significant slowdown in the housing market signal that another quarterly economic contraction is on the cards.
Data showed last month that the US economy contracted in the first quarter at a faster rate than anticipated earlier. According to the Commerce Department's data, the world's largest economy shrank at an annual rate of 1.6 percent in the first quarter.
Another Quarterly Contraction?
The contraction was more than the 1.5% previously reported. According to the advance estimate released in April, the GDP decline was 1.4 percent while the second estimate showed the drop would be 1.5 percent.
Now, analysts believe that incoming data will show that the economy has shrunk for a second consecutive quarter. The Fed acknowledges the fact that the economy risks a recession but considers inflation a bigger worry. Powell has made it clear that he will keep raising interest rates in the months ahead. "Nothing works in the economy without price stability ... We need to see inflation coming down...That's not something we can avoid doing," the Fed chairman said.
Inflation in the US hit 9.1 percent in June, way above the Fed's target range of 2 percent. This was the highest level of inflation recorded since 1981.
Path Forward
The Fed has so far raised interest rates by a whopping 225 basis points in 2022 alone, and analysts expect the central bank to end up raising 350 basis points by the time the year runs out.
Powell is clear that this is the path forward, rather than worrying too much about recession.
"I do not think the US is currently in a recession and the reason is there are too many areas of the economy that are performing too well.. This is a very strong labor market ... it doesn't make sense that the economy would be in a recession with this kind of thing happening," he said.
