No respite in US Fed’s interest rate hike - GulfToday

No respite in US Fed’s interest rate hike


The Federal Reserve Board building in Washington. File/Reuters

On Wednesday, the United States Federal Reserve raised the interest rate by 0.75 per centage points following similar steep hikes earlier. Fed Reserve chairman Jerome Powell did not say whether they have reached the maximum point of rate hikes, though there was speculation that after this the rate hike would be in smaller measures of 0.50 percentage points.

He said, “The question of when to moderate the pace increases is much less important than the question of how high…and how long to keep monetary policy restrictive.” He expressed the view that it is “premature” to discuss the issue of when the Fed will push the pause button in increase in rates. It is also not very clear that the rate hikes have any effect on raging inflation, or whether the Fed would continue with its rate hike policy until inflation reaches a point when it is considered safe. The interest rate now stands at a high of 3.75 per cent to four per cent range. When the rate hike process began, the interest rate hovered around zero. Apparently, at the September meeting, the Federal Open Market Committee had set its sights at 4.50 per cent to 4.75 per cent. The futures market on rate hike has pegged it at 5 per cent. There is the expectation that next round onward, the rate hike would be less steep.

The US domestic economy looked slightly positive with a growth rate of 2.6 per cent in the third quarter after two successive quarters of contraction, falling by 1.6 per cent in the first quarter and by 0.6 per cent in the second. A decline in the third would have made the US economy technically slip into a recession. Consumer prices continued to rise in September. There is the expectation that the US economy could slip into a mild recession in 2023.

Meanwhile, the Bank of England has raised the interest rate by 75 percentage points, taking the rate to 3 per cent from 2.25 per cent. It has also declared that the British economy has entered the recession phase and it will continue till the second quarter of 2024. And the pound has fallen 1.7 per cent lower compared to the dollar. The inflation rate in Britain continues to be high as prices rose by 10.1 per cent in September. The Bank expects inflation to peak at 10.9 per cent by the end of the year, down from 13 per cent earlier.

The situation in the European Zone is not very different, with the Russia-Ukraine war raging without any let-up. The fuel prices are rising continually. Inflation reached 10.7 per cent in October from 9.9 per cent in September. Prices for food, alcohol and tobacco rose by 13.1 per cent while fuel prices shot up by 41.9 per cent compared to last year. The inflation figures were high in specific EU countries, with France registering 7.1 per cent, while it was 16.8 per cent in the Netherlands. The inflation rate was much higher in the Baltic countries, with Estonia at 22.4 per cent, Latvia at 21.8 per cent and Lithuania at 22 per cent.

There seems to be no clarity as to when the Western world will come out of its economic bad weather. The Russia-Ukraine war has certainly aggravated the situation but it seems that the weaknesses in the economy go much deeper. Governmental support has helped the people go through the Covid-19 interruption, but it appears that the governments have reached the end of the tether in their ability to help people with bail-out packages. The governments and the businesses have to find a way out of getting the economy back on its feet. There are no signs of it yet on the horizon.

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