US Fed hikes interest rate to highest level since 2008

Intensifying its fight against chronically high inflation, the United States Federal Reserve has raised its key interest rate by a substantial three-quarters of a point for a third straight time, an aggressive pace that is heightening the risk of an eventual recession.

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

The policymakers also signalled that, by early 2023, they expect to have further raised rates much higher than they had projected in June.

The central bank’s action followed a government report last week that showed high costs spreading more broadly through the economy, with price increases for rents and other services worsening even though some previous drivers of inflation, such as petrol prices, have eased.

By raising borrowing rates, the Fed makes it costlier to take out a mortgage or a car or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.

Fed officials have said they are seeking a “soft landing”, by which they would manage to slow growth enough to tame inflation but not so much as to trigger a recession.

Yet economists increasingly say they think the Fed’s steep rate rises will lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.

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

Falling petrol prices have slightly lowered headline inflation, which was a still-painful 8.3 percent in August compared with a year earlier. Declining petrol prices might have contributed to a recent rise in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.

Short-term rates at a level the Fed is now envisioning would make a recession likelier next year by sharply raising the costs of mortgages, car loans and business loans.

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