Business & Economy

Fed announces another major rate hike

Washington, Jul 27 (EFE).- The United States Federal Reserve said Wednesday that it is increasing its benchmark interest rate by 0.75 percentage point for the second straight month in a bid to curb inflation.

The announcement came at the end of the monthly two-day meeting of the central bank’s policy-making arm, the Federal Open Market Committee (FOMC).

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate,” the Fed said in a statement.

Consecutive rate hikes of this magnitude have not been seen since the 1990s and the overnight funds rate – what the Fed charges banks to borrow money – is at its maximum level since December 2018.

Thirty years ago, the Fed was concerned about inflation of 2.7 percent. The current rate is 9.1 percent, the highest in four decades.

“Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the FOMC said.

The International Monetary Fund (IMF) warned this week of the possibility of a downturn in the world economy.

“The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one,” IMF Chief Economist Pierre-Olivier Gourinchas said Tuesday in Washington.

“The world’s three largest economies, the United States, China and the euro area, are stalling,” he said.

But during a news conference Wednesday after the announcement of the rate hike, Federal Reserve Chairman Jerome Powell rejected the idea that economic recession is already a reality in the US.

“I do not think the U.S. is currently in a recession and the reason is there are too many areas of the economy that are performing too well,” he said.

“This is a very strong labor market,” the Fed chief said. “It doesn’t make sense that the economy would be in a recession with this kind of thing happening.”

The official US unemployment rate last month was 3.6 percent, unchanged from May.

Traditionally, two consecutive quarters of negative economic growth constitutes a recession. Gross domestic product in the US shrank 1.6 percent in the first three months of 2022 and the initial estimate of second quarter GDP is due on Thursday.

Powell cautioned against reading too much into the forthcoming GDP report.

“You tend to take first GDP reports with a grain of salt,” he said. EFE


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