US Fed opens policy meeting with steep rate hike on the table

US Fed opens policy meeting with steep rate hike on the table

The US Federal Reserve is poised to continue raising interest rate to cool the economy
The US Federal Reserve is poised to continue raising interest rate to cool the economy. Photo: Stefani Reynolds / AFP/File
Source: AFP

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US central bankers opened their two-day policy meeting on Tuesday with another steep interest rate hike seen as a near certainty amid stubbornly high inflation.

American families have felt the squeeze of soaring prices, which have risen at the fastest pace since the early 1980s, and Federal Reserve Chair Jerome Powell has made it clear officials will continue to act aggressively to cool the economy.

Many economists are expecting a third straight three-quarter point rate hike when the meeting concludes Wednesday, an unprecedented action.

Fed officials have been united in the message that the US central bank cannot risk letting inflation take hold due to the damaging impact on workers and businesses, but analysts warn that the risks of recession are rising.

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"The inflation rate will continue to call the tune for the path of monetary policy, despite rising risks of a recession in 2023," said Kathy Bostjancic of Oxford Economics, who projects a downturn early next year.

"We see higher-for-longer inflation, more aggressive Fed monetary policy tightening, and negative spillover effects from a weakening global backdrop combining to push the US economy into a mild recession in H1 2023."

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The Fed's policy-setting Federal Open Market Committee (FOMC) is scheduled to announce its decision at 1600 GMT Wednesday.

Markets have been roiled in recent days by the decidedly hawkish statements from central bankers, and Powell's press conference after the meeting will be closely scrutinized for information on what he thinks the next steps will be.

More hikes coming?

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.

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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.

That fear has driven the Fed to front-load its rate hikes, rather than pursuing the more customary course of small, gradual steps over a longer period.

The US central bank has cranked up the benchmark lending rate four times this year, including two straight three-quarter-point hikes in June and July.

The aim is to raise the cost of borrowing and cool demand -- and it is having an impact: Home mortgage rates have now topped six percent for the first time since 2008.

And recent statements from Fed officials indicate more rate hikes are coming, and no cuts until inflation is under control -- dousing hopes that had built up in markets following the July policy meeting.

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The FOMC also will release the quarterly forecasts from members, which will show how they feel about the direction of the economy and the impact of the policy moves, and how soon inflation will come down.

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Source: AFP

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