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Federal Reserve Chairman Jerome Powell is under pressure as price hikes accelerate
The US central bank announced the largest interest rate increase in nearly 30 years As part of its intensive efforts to curb the rise in consumer prices.
The bank, known as the Federal Reserve, said it would raise the benchmark interest rate by three-quarters of a percentage point to 1.75%.
This rise, the third since March, comes following the level of inflation unexpectedly rose last month.
The bank said it expects more increases.
Comments released following the meeting showed that officials expect interest rates to reach 3.4% by the end of the year, a move that will affect people in the form of higher borrowing costs for mortgages, school loans and credit cards.
As central banks around the world are currently taking similar steps, it represents a huge change for the global economy, as businesses and households have benefited from years of low-cost loans.
“Most advanced economy central banks and some emerging market central banks are simultaneously tightening policy. This is a global environment that we have not been accustomed to in the past few decades, and it will have implications for the industry,” said Gregory Daco, chief economist at strategy consultancy EY Parthenon. businesses and consumers around the world.
In the UK, where consumer prices jumped 9% in April, the Bank of England is expected on Thursday to announce its fifth rate hike since December, bringing its record rate above 1% for the first time since 2009.
Brazil, Canada and Australia also raised interest rates, while the European Central Bank laid out plans for a similar move later this summer.
And in the United States, which cut interest rates to support the economy when the coronavirus epidemic broke out in 2020, the Federal Reserve raised interest rates twice this year, by 0.25 percentage points in March and another half in May.
Its boss, Jerome Powell, said at the time that officials were not considering larger increases.
But figures released on Friday showing US inflation rose to 8.6% in May, the fastest pace since 1981, prompted officials to move more aggressively, Powell said.
“Obviously inflation has suddenly taken an upward trend over the past year and there might be other surprises, so we’ll need to be smart,” he added.
Many analysts say the Federal Reserve is struggling to adapt, following inflation began to emerge in the United States last year, due to a stronger-than-expected economic recovery from the shutdown shock during the Covid-19 crisis.
With demand rising, buoyed by trillions of dollars in government relief to contain the epidemic, including the issuance of direct checks to households, officials, including Powell, initially said the price increases were temporary. They said it will back down as related supply chain issues caused by the pandemic are resolved.
But these problems remained as new strains of the virus continued to emerge and spread, the COVID-19 shutdown continued to disrupt activity, and the war in Ukraine pushed up global food and energy prices.
Recent polls indicate that the public expects the problem to continue to fester, despite the Federal Reserve’s pledge to work on it.
“The Fed is under threat and faces a credibility test in terms of fighting inflation,” said economist David Beckworth, senior researcher at the Mercatos Center at George Mason University.
The last time the Federal Reserve announced a rate hike of this size was in 1994.
By acting later and now moving more aggressively to compensate, policymakers stand a greater chance that their actions will trigger an economic downturn, says Dako.
“I am increasingly concerned. I would not be surprised that at the beginning of the year we are facing an environment in which growth is slowing and we are getting very close,” he added. recession, with the unemployment rate rising and not decreasing.”
Forecasts released by the Federal Reserve show that officials expect economic growth of 1.7% this year, a full percentage point lower than they forecast in March.
The unemployment rate is expected to rise to 3.7%. Officials expected the labor market to remain strong and inflation to fall to the bank’s 2% target.
