The US Federal Reserve has raised its benchmark interest rate by a hefty three-quarters of a point for a second straight time in its most aggressive drive in three decades to tame high inflation.
The Fed’s move will raise its key rate, which affects many consumer and business loans, to a range of 2.25 per cent to 2.5 per cent, its highest level since 2018.
The US central bank’s decision follows a jump in inflation to 9.1 per cent, the fastest annual rate in 41 years, and reflects its strenuous efforts to slow price gains across the economy.
By raising borrowing rates, the Fed makes it costlier to take out a mortgage or a car or business loan.
US consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.
The Fed is tightening credit even while the US economy has begun to slow, thereby heightening the risk that its rate hikes will cause a recession later this year or next.
The surge in inflation and fear of a recession have eroded consumer confidence and stirred public anxiety about the economy, which is sending frustratingly mixed signals.
With the November midterm elections nearing, public discontent has diminished US President Joe Biden’s public approval ratings and increased the likelihood that the Democrats will lose control of the House and Senate.
The Fed’s moves to sharply tighten credit have torpedoed the housing market, which is especially sensitive to interest rate changes.
The average rate on a 30-year fixed mortgage has roughly doubled in the past year, to 5.5 per cent, and home sales have tumbled.
At the same time, consumers are showing signs of cutting spending in the face of high prices.
And business surveys suggest that sales are slowing.
The central bank is betting that it can slow growth just enough to tame inflation yet not so much as to trigger a recession – a risk that many analysts fear may end badly.
On Thursday, when the government estimates the gross domestic product for the April-June period, some economists think it may show that the economy shrank for a second straight quarter.
That would meet one longstanding assumption for when a recession has begun.