US raises interest rates again by 75 basis points to combat skyrocketing inflation

The Federal Reserve of the United States (Fed) has raised interest rates this Wednesday for the fourth time in a year with the intention that this aggressive monetary policy help alleviate the serious effects of uncontrolled inflation. The Fed has raised, as it did last month, its benchmark interest rate by three-quarters of a percentage point.

According to the Fed, galloping inflation, which shot up to 9.1% year-on-year in June, is aggravated by the increase in consumption after the pandemic and by a labor market in a situation of technical full employment, with just 3.6 % unemployment. The goal of Federal Reserve, expressed by its president, Jerome Powell, is that inflation returns to a reasonable 2%, without causing a recession, something that seems very complicated to analysts. More and more investment banks, fund managers and experts are predicting that the country will soon enter a recession, albeit very temporarily.

The rate hike was announced in Washington at the end of the Fed's monetary policy meeting this month. It raises rates to the range of 2.25%-2.5%, a level considered neutral by analysts, that is, neither stimulating nor restrictive for the economy. But in their June forecasts, the central bank governors projected that the main rate would end 2022 at almost 3.5%, which may have adverse effects on the economy. Several companies have initiated layoffs and cutbacks in anticipation of a recession, something that has sown fear in the White House, in a midterm election year to renovate the Capitol.

"Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity," reported the Federal Reserve, which has also anticipated that further increases in interest rates will be required in the future to keep interest rates low. control inflation.

The percentage increase is considerably larger than the customary quarter-point rise and the half-point forecast earlier in the year. The benchmark rate had not been in these ranges since before the coronavirus pandemic that began more than two years ago.

The US central bank is now causing the borrowing costs of US companies and citizens to rise even higher, which will lead to a decrease in consumption, with the aim of lowering inflation, but with the probable consequence of forcing an economic slowdown or directly a drop in GDP, just when those fears of a recession In all rules.

The previous US president, Donald Trump, put a lot of pressure on the Fed to lower rates when the pandemic hit. Powell relented and made the first cuts since 2008, which were crucial, though not the only factor, for the current era of high debt, high consumption and high inflation.

Additionally, in late April, the White House revealed that the US economy slowed in the first quarter of 2022. Gross Domestic Product shrank to an annual rate of 1.4% through March, a change from solid growth in the first quarter of 2021, which was 6.9%. Although it is true that a single quarter does not form a pattern of behavior, two consecutive economic downturns pose a problem, a technical recession. US second quarter growth data is due in the next week.

Powell and other Fed board members had targeted back-to-back hikes of 50 basis points in May, something their actions since June belie. At his hearing in May, Powell himself openly ruled out the 75 basis point hike that has now occurred over two separate rounds, saying "it's not something the committee is actively considering." Now the Fed maintains that the severity of inflation has forced it to rethink its forecasts.

And the aggressiveness with which the US central bank is acting is also pushing the European Central Bank (ECB) to follow a similar path. In fact, the institution chaired by Christine Lagarde raised interest rates last week by 50 basis points, compared to 25 points previously expected. Forced by runaway inflation, but also pressured by Fed policy.

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