US Fed tries to control inflation genie with a 75 bps rate hike

Washington D.C., July 28

Expectedly, the US Federal Reserve jacked up its benchmark overnight interest rate by 75 basis points in an effort to tamp down the bristling inflation genie virtually bursting out of the bottle.

The spike in inflation, highest since the 1980s, with "ongoing increases" in borrowing costs against a backdrop ahead of a decelerating economy.

The Federal Reserve raised rates by 75 percentage point, same as that in June.

"The labor market is extremely tight, and inflation is too high," Fed Chair Jerome Powell said at a news conference, explaining the unusually large hike.

Recent indicators of spending and production have softened," the Fed said in a statement.

"Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low."

High interest rates are intended to cut spending "specially on mortgages and autos" and cool demand in the economy and therefore prices.

At the same time, the US Federal Reserve has to walk a thin line here because too many and too steep a rate hike could trigger recession and that's a looming fear.

Asked about the possibility of recession, Powell said at the news conference, "I do not think the US is currently in a recession and the reason is there are too many areas of the economy that are performing too well."

He added: "This is a very strong labor market ... it doesn't make sense that the economy would be in a recession with this kind of thing happening."

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the Federal Open Market Committee said on Wednesday as it lifted the policy rate to a range between 2.25 and 2.50 per cent in a unanimous vote.

Even as employment gains have remained "robust," the Fed noted in the new policy statement that "recent indicators of spending and production have softened," an affirmation to the fact that the aggressive rate hikes they have put in place since March are beginning to bite.

The latest hike comes on the back of a 75-basis-point rate hike in June and smaller bites in May and March, the Fed has now raised its policy rate by a total of 225 basis points in 2022 as it battles a 1980s-level breakout of inflation with 1980s-style monetary policy.