Fed Worsens Recession Fears; Says There's No Plan to Pause Rate Hikes After 75 bps Increase

The Federal Reserve raised the benchmark lending rate by 0.75 percentage point on Wednesday, marking the sixth rate hike this year as red hot inflation continues to ravage the world's largest economy.

Fed Chair Jerome Powell reiterated the need to bite the bullet and face the pain until inflation comes down to a reasonable level, effectively ruling out a soft landing for the economy. "The inflation picture has become more and more challenging over the course of this year. That means we have to have policy more restrictive, and that narrows the path to a soft landing," he said.

Challenging Picture

"The inflation picture has become more and more challenging over the course of this year. That means we have to have policy more restrictive, and that narrows the path to a soft landing."

jerome-powell-explains-fed-rate-hike

A softening of prices is crucial for the Biden administration, which is feared to log a poor performance in the upcoming mid-term elections, but the slew or rate hikes this year by the central bank has not been successful in taming prices so far. The White House welcomed the decision, saying it is part of the transition to stable and steady growth with lower inflation.

Instead, the Fed is risking a recession as it curbs money flow in the economy. The Fed leadership has consistently said it's a risk worth taking in the face of historically high inflation.

With the latest three-quarter percentage point hike, the benchmark lending rate has increased to a range between 3.75 and 4.0 percent, which is the highest level since January 2008.

No Plan to Pause Hikes

Significantly, the Fed said it has not started, yet, to think about pausing the rate hikes. According to the Federal Open Market Committee (FOMC), there will be more rate increases in the coming months.

"In determining the pace of future increases in the target range the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments," the FOMC policy statement said.

The Federal Reserve
The Federal Reserve YouTube Grab

Federal Reserve Chairman Jerome Powell confirmed that the policymakers are not ready to halt rate hikes. "It will take time, however, for the full effects of monetary restraint to be realised, especially on inflation ... It's very premature in my view to be thinking about or talking about pausing our rate hike. We have a ways to go," Powell said.

However, the FOMC said it will consider the impact of rate hikes on the economy when it revisits benchmark rates in its future assessments. Analysts consider this as a sign that the rate hikes in the coming months will be smaller.

Accusations

The Fed has been battling accusations that it has gone too quickly on monetary tightening. Powell denied the charge on Wednesday, saying instead that high inflation will inflict more pain on the economy.

US dollar
US dollar IANS

"Our policy, we need ongoing rate hikes to get to that level of sufficiently restrictive [territory] — and of course, we don't know exactly where that is. ... I would expect to us to continue to update it based on what we're seeing with incoming data," Powell said.

Join the Discussion
READ MORE