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US Federal Reserve raises interest rates by 0.75 percent

Interest rates in the US are up again. It is the fourth increase in the past four months.

Interest rates in the US are up again. It is the fourth increase in the past four months.

Canada has been following the US pattern. In July, however, Canada went for the biggest hike in recent years by ordering a 1 per cent increase.

The Federal Reserve (US) and Bank of Canada have been maintaining that an increase in interest rates would calm down inflation though it may slow down the economy.

In the latest announcement, the Federal Reserve raised interest rates by three-quarters of a percentage point on Wednesday, continuing its aggressive campaign to cool rapid inflation even as the economy begins to slow, media reports said.

Central bankers voted unanimously to make the unusually large interest rate move, and the policy-setting Federal Open Market Committee signalled in its post meeting statement   that more is coming, saying that it “anticipates that ongoing increases in the target range will be appropriate.”

The Fed’s policy rate, which trickles out through the economy to affect other borrowing costs and curtail growth, is now set to a range of 2.25 to 2.5 percent.

The Fed began raising interest rates from near-zero in March, and policymakers have picked up the pace since. After making a quarter-point move to start, they raised by half a point in May and by three-quarters of a point in June, which was the largest single step since 1994.

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Fed officials made a second supersized increase on Wednesday because they are trying urgently to wrestle abnormally rapid inflation back under control.

While officials acknowledged in their statement that spending and production data have “softened,” they also pointed out that job gains have been “robust” and that prices continue to increase quickly, “reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

Consumer prices climbed by 9.1 per cent  in the year through June, and central bankers are nervous that, after more than a year of rapid cost increases, Americans might begin to expect inflation to last. If people and businesses start to adjust their behaviour in anticipation of rising prices — with workers asking for higher wages, and companies passing their climbing costs expenses through to customers — that could make inflation a more permanent feature of the economy.

The United States is not alone in waging a campaign against rapid price increases. Inflation has picked pace around the world   as the pandemic has roiled supply chains and as Russia’s war in Ukraine disrupts fuel and food markets. Many central banks are lifting interest rates rapidly in order to slow their own economies down, hoping to bring prices back under control.

Higher interest rates work to slow down inflation by cooling off demand. When money costs more to borrow, fewer people take out mortgages to buy houses or business loans to expand their companies. With less economic activity happening, the supply of goods and services available can catch up to demand. And as companies face weaker profits and sales and hire less, job and wage growth declines, further weighing on consumption.

Slowing the economy is a painful process — one that often sends unemployment higher — and the Fed itself acknowledges that its tools are blunt and that its fight to control inflation risks tipping the economy into an outright recession.


Prabhjot Singh

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