The Fed rate hike was definitely seen after ugly inflation data

WASHINGTON: The Federal Reserve is set to raise interest rates in another big way this week, as the latest data showed worrying US inflation The picture, which confirmed the need for the central bank to continue to act aggressively.
Despite a welcome drop in petrol prices at the pump in recent weeks, rising prices have pushed annual inflation to a 40-year high, hurting American consumers and businesses.
The disappointing Consumer Price Report for August, released last week, showed housing, food and medical costs continued to rise. And when volatile food and energy prices are removed, so-called core inflation accelerates.
Families are struggling with initially rising prices due to high demand as the world’s largest economy faces a supply chain crisis. The situation has been exacerbated by the Kovid lockdown in China and the rise in energy and food prices due to Russia’s war in Ukraine.
It is not just current high inflation that worries policymakers, but the fear that consumers and businesses will begin to expect rising prices to become a permanent feature, which can set off an alarming spiral and a phenomenon called stagflation. .
That fear has prompted the Fed to pursue its rate hikes rather than pursue the more customary course of small, gradual steps over the long term.
The US central bank has cranked out the benchmark lending rate four times this year, including two straight three-quarter-point increases in June and July.
It aims to raise borrowing costs and calm demand—and it’s having an effect: home mortgage rates are now above six percent for the first time since 2008.
A third huge increase is expected on Wednesday at the conclusion of the Fed’s two-day policy meeting. And some are raising the possibility that the US central bank could take an even bigger step.
But there are growing concerns that aggressive action could propel the US economy into a recession that will reverberate around the world.
“The sharp, key inflation data this week for August has put pressure on the Federal Reserve to raise a full percentage point instead of 0.75% at the upcoming meeting,” said Diane Swonk, chief economist at KPMG US. said in an analysis.
“This will be one of the most difficult and politically charged decisions to make. It is the Federal Reserve’s first step toward a real recession.”
fed chair Jerome Powell has made it clear that a recession is a risk it is willing to take. Indeed, it is a risk the central bank must take to avoid an even more dire consequence: a repeat of the damaging, runaway inflation of the 1970s and early 1980s.
“We clearly need to act now, as we have been doing and we need to keep at it until the work is done,” Powell said in his final public remarks before the policy meeting.
Powell’s predecessor from the previous high-inflation era, Paul Volcker, had to take extreme measures after repeated unsuccessful attempts to tame him after being trapped by rising prices, resurfacing and crossing the mid-1970s peak.
This led to a deep recession and unemployment of more than 10 percent.
The Fed aims to avoid the “very high social costs” of the Volcker era, and maintain public confidence in the central bank’s commitment to fighting inflation.
“The clock is ticking,” warned Powell.
While the latest data shows US annual inflation slowed slightly to 8.3 percent in August – from a peak of 9.1 percent in June – prices actually rose slightly in the month, reflecting broader price increases.
Central bankers have had the luxuries of a strong job market, low unemployment and a resilient American consumer, but many economists now see the prospect of a recession.
Former US Treasury Secretary Lawrence Summers is among the warnings that unemployment will need to rise in order to bring inflation under control.
He also supports more aggressive Fed action.
“If I had to choose between 100 basis points and 50 basis points in September, I would choose the 100 basis point move to strengthen credibility,” Summers said in a recent tweet.

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