US Fed raises interest rate in battle against high inflation

AFP , Wednesday 16 Mar 2022

The Federal Reserve escalated its battle against the wave of prices increases battering the US economy on Wednesday by raising the benchmark interest even as it acknowledged the risk posed by the war in Ukraine.

Federal Reserve Chair Jerome Powell
Federal Reserve Chair Jerome Powell has vowed the central bank will act to curb US inflation while being mindful of economic growth. AFP

At the conclusion of its two-day meeting, the policy-setting Federal Open Market Committee (FOMC) announced a quarter-point rate hike, the first since 2018 and since it cut the rate to zero at the start of the Covid-19 pandemic.

The central bank is walking a tightrope to ensure its efforts don't derail the recovery from the Covid-19 pandemic even as Russia's invasion of Ukraine introduces new uncertainty in an economy battered by supply chain snarls and labor shortages.

In a statement, the FOMC said the fallout from the war in Ukraine is "likely to create additional upward pressure on inflation" and also could "weigh on economic activity," although the "implications for the US economy are highly uncertain."

Pointing to "elevated" inflation due to "supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures," the statement said that "ongoing increases" in the policy rate will be "appropriate."

While the rate cut in March 2020 was meant to support the economy as Covid-19 caused massive disruptions to businesses, the United States over the past year has been hit by high inflation, with prices for gasoline, food, cars, and rents pushing the overall consumer price index to a four-decade high.

Markets are expecting as many as seven rate hikes this year, which would take the policy rate to 1.75 percent, assuming the central bank increases by a quarter-point at each meeting.

Dissenting Vote 

Federal Reserve Chair Jerome Powell has said policymakers will do whatever it takes to keep inflation from becoming entrenched, including larger rate hikes.

One member of the committee, St. Louis Fed President James Bullard, dissented from the vote, arguing for a more aggressive half-point increase as the first step in the tightening cycle.

The FOMC also released its quarterly economic projections, showing members of the committee raised their median inflation forecast for the year to 4.3 percent from 2.6 percent previously, and slashed the growth estimate to 2.8 percent from 4.0 percent.

Members were split on how high rates would go, with nine still expecting the level to be below two percent at the end of the year, and seven looking for a higher rate.

The last time the Fed raised interest rates was in December 2018.

US stocks opened the day with solid gains, but retreated after the announcement, although they stayed in positive territory.

The blue-chip Dow Jones Industrial Average was up less than 0.2 percent around 1820 GMT.

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