Steep Fed rate hike seen

The Federal Reserve is poised to raise interest rates for the fifth time

WASHINGTON (AFP) — The Federal Reserve is poised to unleash another massive interest rate increase this week after the latest data showed a worrying United States inflation picture, which confirmed the need for the central bank to continue to act aggressively.

A third massive increase is expected Wednesday at the conclusion of the Fed’s two-day policy meeting. And some people are raising the possibility the US central bank could take an even bigger step.

But concerns are rising that the aggressive action could tip the US economy into recession, which would reverberate around the globe.

Soaring prices have pushed annual inflation to a 40-year high, inflicting pain on American consumers and businesses, despite the welcome drop in gasoline prices at the pump in recent weeks.

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 stripped out, so-called core inflation accelerated.

Families have been struggling with rising prices sparked initially by high demand as the world’s largest economy emerged from the pandemic amid supply chain snarls. The situation has been exacerbated by Covid lockdowns in China and surging energy and food prices due to Russia’s war in Ukraine.

Stagflation

“The sizzling-hot, core inflation figures that came out this week for August have upped the pressure on the Federal Reserve to raise rates a full percentage point instead of 0.75 percent at the upcoming meeting,” Diane Swonk, chief economist at KPMG US, said in an analysis.

“This will be one of the hardest and most politically charged of decisions. It marks the Federal Reserve’s first move toward an actual recession.”

It is not just current high inflation that concerns policymakers, but the fear that consumers and businesses begin to expect rising prices will become a permanent feature, which could set off a dangerous spiral and a phenomenon called stagflation.


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