The US central bank on Wednesday evening announced t that it would raise the benchmark interest rate by 75 basis points to cushion rising inflation. Earlier this week, the Fed already indicated to markets that it would do so. Economists and analysts last week were still expecting a 50 bp increase. The bigger-than-expected hike increases the chances of a recession in the United States.
“It is clear that this 75 basis point rate hike is an unusually large increase. We do not expect these steps to become customary,” said Fed President Jerome Powell during the presentation after the interest rate decision.
In response to last Friday’s poor inflation data and volatile financial markets, the interest-rate-setting Federal Open Market Committee raised the rate banks charge each other for overnight loans to a range of 1.5 -1.75 percent, where it has not been since the start of the Covid pandemic.
Fed members lowering growth forecasts
The Fed also signalled its intention to raise interest rates faster than previously expected. The benchmark interest rate will stand at 3.4 percent by the end of 2022. That is more than 1.5 per cent higher than expected in March. In addition, Fed members are lowering growth forecasts for the US economy from 2.8 per cent GDP increase, to 1.7 per cent increase for 2022. This is almost one percent lower than the growth expected in March.
The persistent failure to do so over the past 12 months is changing the perception of the Fed from the world’s most powerful central bank - long respected for its ability to anchor global financial stability - to an institution that looks too much like an emerging markets bank with no credibility and unintentionally contributing to unnecessary financial volatility. Regaining control of the inflation story is crucial for the Fed’s policy effectiveness, reputation and political independence. The longer it takes, the greater the negative consequences for economic well-being and social equity in the US, and the greater the negative spillover effects for the rest of the world.
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