Fed piles pressure on Bank of England with another steep rate rise
THE Federal Reserve has raised interest rates by 0.75 percentage points for a second straight month in the most aggressive tightening since the 1980s, piling pressure on the Bank of England to stamp down harder on surging prices.
The US central bank kept up the breakneck pace of interest rate increases and vowed to lift borrowing costs even further despite warning of a deepening slowdown in the world’s largest economy.
Its key interest rate was increased to its joint highest level since the financial crisis even as recession fears mount.
It is the first time US rate-setters have decided on such drastic rises in back-toback meetings since the 1980s, in a move that could force the hand of other central banks as they fall behind.
Jerome Powell, the Fed’s chairman, signalled that further US increases are on the way, although they will now begin to slow after dramatic action taken to cool demand in recent months.
The Fed’s actions will turn up the heat on the Bank of England as it faces mounting pressure from Conservative MPS to get to grips with inflation as elections begin for the party’s next leader.
The Bank is weighing up a 0.5 percentage point increase ahead of its meeting next week in what would be the biggest rise in interest rates in almost three decades.
Liz Truss has called for a review into the Bank’s mandate while Rishi Sunak has warned that his Tory leadership rival’s tax cuts risk making inflation worse and lifting rates even higher.
Mr Powell’s move lifts the target range on the Fed Funds Rate from 1.5pc- 1.75pc to 2.25pc-2.5pc with markets expecting it to climb above 3pc by the end of this year.
Stock markets in the US rocketed after Mr Powell signalled that the pace of rate increases will begin to slow as the Fed moves to a “meeting by meeting” stance. The S&P 500, the benchmark US stock index, jumped 2.4pc and bond yields slipped back on hopes of fewer rate rises after markets were battered by central bank action in 2022.
Mr Powell said the rate-setters will likely decide to “slow the pace of increases” of rate rises, but did not rule out “another unusually large” jump at its next meeting if needed.
The Fed and other central banks face a difficult balancing act as they attempt to tame inflation with rate rises without tipping their countries into recession. The odds of policymakers executing a so-called “soft landing” for the economy are shrinking with more forecasters on Wall Street predicting a recession.
Mr Powell said the US is not currently in recession, but admitted there are growing signs of a slowdown.
He warned of evidence of weakening spending and industrial production, but also pointed to a strong jobs market as low unemployment puts more upward pressure on inflation.
“I do not think the US is in a recession and the reason is there are too many areas of the economy that are performing too well and, of course, I would point to the labour market in particular.”
Kiran Ganesh at UBS Global Wealth Management said: “The Fed is trying to thread the eye of the needle as it seeks to underline its credibility on inflationfighting without over tightening.”
US inflation hit 9.1pc in June as food and energy prices surged, but there are clear signs that the economy is slowing. Second quarter GDP data today could reveal that the US economy is in a technical recession after a contraction in the first three months of the year.
Seema Shah, chief strategist at Principal Global Investors, said the Fed is on “one of the most aggressive rate rising cycles we’ve seen in recent decades”.