The Daily Telegraph
US lifts interest rates to post-crisis high
Increase piles pressure on Bank of England to act strongly today as pound and euro fall against dollar
The US Federal Reserve lifted interest rates to a post-financial crisis high last night as it warned of more painful increases to come in the fight against inflation. Jerome Powell, the Fed chairman, indicated that interest rates have only just reached levels in the US where they are starting to have a restrictive effect on prices. The 0.75 percentage point rise by the Fed will pile pressure on the Bank of England to follow suit today as the pound and the euro fell to fresh lows against the dollar.
THE US Federal Reserve lifted interest rates to a post-financial crisis high last night as chairman Jerome Powell warned that the overpriced American housing market is heading for a painful correction.
Mr Powell said central banks have some “way to go” in their fight against inflation and indicated that interest rates have only just reached levels in the US where they are starting to have the necessary restrictive effect on prices.
He warned that the US market had been through a period of “red hot” growth and added: “What we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace and people can afford houses again. We probably in the housing market have to go through a correction to get back to that place.”
The 0.75 percentage point increase by the Fed will pile pressure on the Bank of England to follow suit today as the pound and euro plunged to fresh multi-decade lows against the dollar.
The Fed’s increase is its third consecutive 0.75-point rise, taking the target range of interest rates to 3pc-3.25pc. Its policymakers predicted that more hefty increases will push the body’s key federal funds rates to 4.4pc by the end of the year.
Mr Powell said he is “strongly committed” to keep raising interest rates until “the job is done” in another hawkish signal to markets as the Fed slashed its economic forecasts.
He said the US rate-setters are “strongly resolved to bring inflation down to 2pc” and there is still a “way to go” before they can remove monetary policy from restrictive settings.
“We will keep at it until we’re confident the job is done,” he said. “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
The Fed and other central banks have embarked on the most aggressive rate rises since the 1980s with inflation in the US hitting a 40-year high above 8pc. Price pressures have worsened considerably since the war erupted in Ukraine, stoking fears that rate rises will tip economies in recession.
Stocks and bonds tumbled in the wake of the decision as the rampant dollar extended its gains on currency markets. The pound slipped below $1.13 against the dollar to a new 37-year low while the euro extended its fall below parity to hit a new 20-year nadir versus the greenback.
The Fed’s decision has a direct impact on borrowing costs outside of the US and will ramp up the pressure on other central banks to follow suit. The Bank of England will decide today whether to also take a hawkish stance against inflation and boost rates by 0.75 percentage points to 2.5pc. With the pound plunging against the dollar, the Bank could opt for its biggest rate increase since Black Wednesday in 1992.
The Fed’s policymakers downgraded their growth forecasts as inflation eats into households’ disposable income. Tighter monetary policy will cap growth to 1.2pc in 2023 and 1.7pc in 2024, down from its previous forecasts of 1.7pc and 1.9pc respectively.
Anna Stupnytska, of Fidelity International, said: “Without delivering the full 100bp, the Fed still managed to outhawk the markets.”