The much-anticipated rate hike by the US Federal Reserve was announced on Wednesday, stating a 0.75 percent increase—a hike that the Fed believes would help address the growing inflation situation in the United States of America.
The Fed also promised to slow down its aggressive policy tightening in the near future, fearing that the economy may jump into recession if the current cost of borrowing persists. This hike is the fourth this year.
During its press briefing, Jerome Powell, the Fed chairman, said that “the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.”
“In support of these goals, the committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent,” he added.
The committee agreed that rate hikes will continue, albeit moderately, until “inflation is returned to 2 percent over time.”
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” Powell said.
“In addition, the Committee will continue reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities, as described in the plans for reducing the size of the federal reserve’s valance sheet that were issued in May.”
He promised that not only would the Fed monitor the health of the economy but it would also take the right monetary policy measures to ensure that inflation is returned to 2 percent.
“The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” he noted.
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The decision to raise the rate was a result of how the monetary tightening by the Fed has helped address inflation in the US. This can be seen from the low unemployment that persists in the US economy despite supply and demand imbalances caused by the COVID-19 pandemic and the higher food and energy prices.
“Recent indicators point to modest growth in spending and production,” Powell said. “Job gains have been robust in recent months, and the unemployment rate has remained low.”
Powell linked the Fed’s reasons for the new rate hike to the Russian war on Ukraine, which is “causing tremendous human and economic hardship.” Also linked are other events that are creating additional upward pressure on inflation and are weighing on global economic activity.
Vince Reinhart, chief economist at Dreyfus and Mellon, who spoke with the Associated Press, said that the Powell-led US Fed has been able to achieve his objective with this new rate. “I think he accomplished his goal,” he said. “That’s why the market was so confused.”
The Fed’s meeting occurred as financial markets and many economists have grown nervous that Powell will end up leading the central bank to raise borrowing costs higher than needed to tame inflation and will cause a painful recession in the process.
Powell implicitly addressed those fears at his news conference. He kept the door open to downshifting to a half-point hike when the Fed next meets in December. The central bank could then step down even further to a quarter-point increase — a more typically sized rate hike — early next year.
