The US Federal Reserve raises interest rates to the highest level since 2008 | Business and Economics News

Intensifying its war against chronic high inflation, the US Federal Reserve raised its key interest rate by three-quarters of a large point for the third time in a row, an aggressive pace that raises the risk of an eventual recession.

The Fed’s move on Wednesday boosted the benchmark short-term interest rate, which affects many consumer and business loans, to a range of 3 percent to 3.25 percent, the highest level since early 2008.

Policy makers also indicated that by early 2023, they expect to raise rates much higher than they projected in June.

The central bank’s action came on the heels of a government report last week that showed higher costs spread more widely across the economy, with prices for rents and other services deteriorating despite some pre-inflationary factors, such as gasoline prices, declining.

By raising borrowing rates, the Federal Reserve makes getting a mortgage, car, or business loan more expensive. Consumers and businesses are then supposed to borrow and spend less, cooling the economy and slowing inflation.

Federal Reserve officials said they are seeking a “soft landing,” in which they can slow growth enough to tame inflation but not so much as to cause a recession.

Increasingly, however, economists say they believe sharp increases in federal interest rates will, over time, lead to job cuts, increased unemployment, and a full-blown recession late this year or early next.

President Jerome Powell acknowledged in a speech last month that the Fed’s moves would “bring some pain” to households and businesses. He added that the central bank’s commitment to reduce inflation to the 2% target was “unconditional”.

Lower gasoline prices led to a slight drop in the headline inflation rate, which was still a painful 8.3 percent in August compared to a year earlier. Falling gasoline prices may have contributed to the recent spike in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.

Short-term rates at the level the Fed now imagines would make a recession more likely next year by sharply raising the costs of mortgages, auto loans and business loans.

The economy hasn’t seen rates as high as the Fed expects since before the 2008 financial crisis. Last week, the average fixed-rate mortgage rate crossed 6 percent, its highest level in 14 years. Credit card borrowing costs are at their highest level since 1996, according to Bankrate.com.

Inflation now appears increasingly to be fueled by rising wages and consumers’ steady desire to spend and to a lesser extent by the lack of supplies that have spoiled the economy during the pandemic.

However, Biden said Sunday on CBS’ “60 Minutes” news program that he believes an easy landing for the economy is still possible, suggesting that his recent energy and health care administration’s legislation will lower drug and health care prices.

Some economists are beginning to worry that rapid increases in federal interest rates – the fastest since the early 1980s – will do too much economic damage to tame inflation.

Mike Konzal, an economist at the Roosevelt Institute, has noted that the economy is already slowing and that wage increases – the main driver of inflation – are stabilizing and some measures are falling.

Surveys also show that Americans expect inflation to decline significantly over the next five years.

This is an important trend because inflation expectations can be self-fulfilling: if people expect inflation to fall, some will feel less pressure to speed up their purchases. Less spending would help moderate price increases.

Konczal said there is an argument to be made for the Fed to slow rate increases over the next two meetings. “Given the cold coming,” he said, “you don’t want to rush into this.”

The Fed’s rapid rate increases mirror steps other major central banks are taking, contributing to concerns about a possible global recession.

Last week, the European Central Bank raised its benchmark interest rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all raised interest rates significantly in recent weeks.

And in China, the world’s second-largest economy, growth is already suffering from repeated government shutdowns of the coronavirus. If a recession engulfs most of the big economies, it could derail the US economy as well.

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