WASHINGTON: The Federal Reserve raised the key US interest rate again on Wednesday and said more hikes are coming as it battles soaring prices — an aggressive stance that has raised fears of a recession.

It was the third consecutive increase of 0.75 percentage point by the Fed’s policy-setting Federal Open Market Committee (FOMC), continuing the forceful action to tamp down inflation that has surged to the highest in 40 years.

The increase takes the policy rate to 3.0-3.25 per cent, and the FOMC said it “anticipates that ongoing increases... will be appropriate.” Soaring prices are putting the squeeze on American families and businesses and have become a political liability for President Joe Biden, as he faces midterm congressional elections in early November.

But a contraction of the world’s largest economy would be a more damaging blow to Biden, to the Fed’s credibility and the world at large.

Federal Reserve Chair Jerome Powell has made it clear that officials will continue to act aggressively to cool the economy and avoid a repeat of the 1970s and early 1980s, the last time US inflation got out of control.

It took tough action — and a recession — to finally bring prices down in the 1980s, and the Fed is unwilling to give up its hard-won, inflation-fighting credibility.

The Fed’s quarterly forecasts released with the rate decision on Wednesday show FOMC members expect a sharp slowdown with US GDP growth of just 0.2pc this year, but a return to expansion in 2023, with annual growth of 1.2pc.

Economist Diane Swonk of KPMG warned the central bank will come under increasing pressure, especially if unemployment begins to rise, and Fed officials “will become political pinatas.” While the FOMC noted continued “robust” job gains in recent months and low unemployment, the forecasts project the jobless rate will rise to 4.4 percent next year and hold around that level through 2025.

Powell and other central bankers have been sending the same message: An economic downturn is better than continued high inflation given the pain that would inflict, especially on those least able to withstand it.

Published in Dawn, September 22nd, 2022

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