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Fed makes biggest rate hike since 2000

Construction workers pass planks of wood to co-workers overhead during the construction of new apartments in Monterey Park, California. Inflation in the United States has become a major concern after the world’s largest economy saw annual consumer prices rise 8.5% in the 12 months to March, the biggest increase since December 1981. Photo: AFP/FILE

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Construction workers pass planks of wood to co-workers overhead during the construction of new apartments in Monterey Park, California. Inflation in the United States has become a major concern after the world’s largest economy saw annual consumer prices rise 8.5% in the 12 months to March, the biggest increase since December 1981. Photo: AFP/FILE

The Federal Reserve announced its biggest rate hike since 2000, rising half a percentage point as it strives to crush soaring US inflation.

With inflation at the highest rate in four decades, Federal Reserve Chairman Jerome Powell sent a message directly to the American people, expressing concern over the pain caused by rising prices and pledging to use all available tools to bring them down.

But he told reporters he remained confident the economy was strong enough to withstand rate hikes without tipping into a recession.

After a quarter-point hike in March, the US central bank’s Federal Open Market Committee (FOMC) pushed the benchmark interest rate above 0.75% as it helps cool the economy. economy, and confirmed that further increases “would be appropriate”.

The rise will increase the costs of all types of borrowing, from mortgages to credit cards to auto loans, which will slow demand and business activity.

Inflation has become a major concern after the world’s largest economy saw consumer prices rise 8.5% annually in the 12 months to March, the biggest rise since December 1981 .

Policymakers continue to believe inflation will gradually return to the Fed’s 2% target as it raises borrowing costs, but in a statement after its two-day meeting, the FOMC said it would be “very attentive to inflation risks”.

In an unusual move, Powell opened his press conference by addressing the American people.

“Inflation is far too high. And we understand the difficulties that result,” he said, promising to use all available tools to bring it down “rapidly”.

He acknowledged that higher interest rates also bring their share of pain, but “everyone would be better off if we could get this job done. The sooner the better.”

To achieve that goal, he said “additional increases of 50 basis points should be on the table in the next two meetings,” but a more aggressive three-quarter point increase is not on the cards.

The Fed’s goal is to stage a “soft landing,” keeping inflation under control while avoiding a contraction in economic activity, and Powell said the outcome is likely.

“It’s a strong economy, and nothing about it suggests…that it’s close or vulnerable to a recession,” he said.

But with China’s pandemic lockdowns adding to global supply rumbles and the war in Ukraine pushing commodity prices higher, analysts worry that factors beyond the central bank’s control could undermine this. objective and possibly plunge the US economy into a recession.

The FOMC acknowledged the “highly uncertain” impact of the Russian invasion of Ukraine and Western sanctions against Moscow, which “create additional upward pressure on inflation and are likely to weigh on economic activity “.

Additionally, Covid lockdowns in China “are likely to exacerbate supply chain disruptions,” the statement said.

Although it contracted in the first quarter, Powell said the economy was healthy enough to withstand higher rates, and pointed to strong job gains and strong household and business spending.

However, central bankers cannot find a solution to the labor shortages that have tested companies and raised fears of a wage and price spiral, when employees demand higher wages and raises. the price of fuel.

Powell played down those concerns, saying some of the inflation is driven by price shocks, while Fed policy can help address “imbalance” in the labor market.

On Wednesday, payroll services firm ADP reported that private employers added 247,000 weaker-than-expected workers in April, a sign companies are struggling to find available labor, while government data published on Tuesday showed that there were nearly two openings for every job seeker.

The FOMC also said it would begin trimming its massive bond holdings from June 1, starting at the rate of $47.5 billion a month, then doubling after three months, also in a bid to remove stimulus. economy.

The decision was widely expected, and many economists believe the FOMC will hike rates again by half a point in June, although Pantheon Economics’ Ian Shepherdson said: “After that, we think all bets are off. , given the likelihood of a sustained surge, lower inflation, a sharp slowdown in manufacturing and a slump in housing market activity.”

Stock markets applauded the Fed’s decision, closing sharply higher, with big gains in interest-rate-sensitive tech stocks.