Fed ramps up inflation fight, saying economy can cope
The US Federal Reserve has kicked off a series of interest rate hikes that are set to be the most aggressive since the mid-2000s, as chair Jerome Powell assured Americans that the economy won’t tip into recession.
After raising rates by a quarter point for the first time since 2018 and signalling six more increases this year, Powell said inflation is too high, the labour market is overheated and price stability is a “precondition” for the central bank as it tackles the hottest price pressures in 40 years.
“As I looked around the table at today’s meeting, I saw a committee that’s acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that,” Powell said this week after a two-day meeting of the Federal Open Market Committee.
“The American economy is very strong and well positioned to handle tighter monetary policy.”
Policymakers voted 8-1 to lift their key rate to a target range of 0.25% to 0.5% after two years of holding borrowing costs near zero to insulate the economy from the pandemic.
They forecast a sequence of rate hikes, finishing this year at 1.9% and then to about 2.8% by the end of 2023, which would be considered restrictive to growth.
From June 2004 to June 2006, the Fed moved its benchmark up from 1% to 5.25%, tightening at 17 straight meetings.
Seven policymakers want an even faster pace of increases this year, which raises the prospect of a half-point move in future.
“The Fed has now waged a war on inflation,” said Diane Swonk, chief economist at Grant Thornton. “They want to bring inflation down with the most aggressive surge in rates in decades.”
The Fed said that Russia’s invasion of Ukraine posed “highly uncertain” implications for the economy that create near-term upward pressure on inflation while weighing on economic activity.
Still, Powell played down the risk of recession and repeatedly stressed that the economy is “very strong” while emphasising the need for price stability.