Federal Reserve delivers on its painful promise

US central bank raises interest rates by 75 basis points for a third straight time amid soaring inflation

Fed Chair Jerome Powell said the Federal Reserve will continue to act aggressively to cool US inflation after increasing interest rates by 75 basis points for a third time. Bloomberg

The US Federal Reserve on Wednesday raised interest rates by 75 basis points for a third consecutive time in its continued battle against the soaring cost of goods, signaling that even more rate hikes are to come.

The central bank adjusted its benchmark short-term rate to 3-3.25 per cent, which will make borrowing even more expensive for American households and businesses at a time when they are already experiencing economic hardship. Federal Open Market Committee (FOMC) officials expect to raise the benchmark rate to 4.4 per cent by year's end.

The latest decision makes good on Fed Chairman Jerome Powell's ominous warning last month that Americans will feel the pain of the central bank's actions. But the pain that Americans will feel in unemployment and high credit card rates will pale in comparison if the Fed does not restore price stability, he said.

This marks the third time in as many meetings that the Fed has raised interest rates by three quarters of a percentage point, the first time the agency has carried out such an action since the recession of the 1980s.

The Fed will continue to act aggressively until Mr Powell feels confident that inflation will return to 2 per cent.

"My main message has not changed at all since Jackson Hole," Mr Powell told reporters during a news conference.

"The FOMC is strongly resolved to bring inflation down to 2 per cent and we will keep at it until the job is done."

The Fed's objectives of cooling inflation have thus far worked, Mr Powell said, citing a slowing down of real consumer spending and lower real disposable income.

Mr Powell is hoping to achieve a "soft landing", slowing down the economy without steering it into a recession. But he said that, as the Fed continues to apply a restrictive policy, the odds of achieving that diminish.

And by continuing to weaken the economy, he and the Fed risk wiping out the job gains made under President Joe Biden and steering the economy into a recession.

“No one knows whether this process will lead to a recession, or if so, how significant that recession would be,” Mr Powell said. “That’s going to depend on how quickly we bring down inflation.”

Though the Fed's forecast for the year shook investors who believe a recession is still possible, AvaTrade chief market analyst Naeem Aslam said the situation could have been much worse.

"The fact that we have not seen that much interest rate hike today ... should be considered good news. This fact may actually bring some bargain hunters into the market when panic settles," he said.

Regardless, 56 per cent of Americans in August reported facing financial hardship because of escalating prices, up from 49 per cent at the beginning of the year, a recent Gallup poll showed. Lower-income households in particular are facing “either severe or moderate hardship”.

Mr Powell acknowledged the Fed's actions are likely to cause the most harm to lower-income households who spend a significant portion of their paycheques on basic necessities and transport.

"You don't have a cushion," Mr Powell said, though he could not give a timetable on how long families will feel the effects of the Fed's actions.

Inflation is putting increasing pressure on the Biden administration to tackle rising prices as he leads his Democratic Party into the midterm elections next month. In an interview with CBS last week, he echoed the Fed chairman's hopes that there could be a soft landing for the economy.

“I'm telling the American people that we're going to get control of inflation,” Mr Biden told the US broadcaster.

Government data released last week showed that consumer prices rose by 8.3 per cent in the month of August compared to a year earlier, down slightly from the 8.5 per cent seen in July, but still above economists' projections.

Citing Russia's war against Ukraine and the continued effects of the coronavirus pandemic, the Fed suggested that inflation remains a global phenomenon.

“Russia's war against Ukraine is causing tremendous human and economic hardship,” its said in a statement.

The Biden administration has also pushed back against claims that the country is heading towards a recession, citing a strong labour market, low unemployment and declining petrol costs.