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The US Federal Reserve raises interest rates to their highest level since 2008

The announcement sparked concerns that the fight to contain sky-high US inflation could plunge the economy into recession.

The US Federal Reserve is stepping up its fight against chronically high inflation, raising interest rates by a sizeable three-quarters point for the third straight month, an aggressive pace that increases the risk of an eventual recession.

The Fed’s move on Wednesday raised its short-term interest rate, which affects many consumer and business loans, to a range of 3 percent to 3.25 percent, the highest level since early 2008.

Policymakers also signaled that they expect further rate hikes through early 2023, much higher than forecast as recently as June.

The central bank’s actions followed a government report last week that showed high costs were spreading more broadly across the economy, with price hikes for rent and other services worsening, although some earlier inflationary drivers, such as petrol prices, had eased.

By raising lending rates, the Fed makes it more expensive to get a mortgage, car loan, or business loan. Consumers and businesses are then likely to borrow and spend less, cooling the economy and slowing inflation.

Fed officials have said they are aiming for a “soft landing” that would slow growth enough to tame inflation, but not so much as to trigger a recession.

But economists are increasingly saying they believe the Fed’s steep rate hikes over time will lead to job cuts, rising unemployment and a full-blown recession later this year or early next year.

Chairman Jerome Powell acknowledged in a speech last month that the Fed’s actions would cause “some pain” to households and businesses. And he added that the central bank’s pledge to bring inflation back to its 2 percent target was “unconditional”.

Falling gasoline prices have slightly lowered headline inflation, which was still a painful 8.3 percent year-on-year in August. Falling gas prices may have contributed to a recent surge in public approval ratings for President Joe Biden, which Democrats hope will boost their prospects in November’s midterm elections.

Short-term interest rates at levels the Fed now envisions would make a recession more likely next year by sharply increasing the cost of mortgages, auto loans and business credit.

The economy has not seen interest rates as high as the Fed is projecting since the 2008 financial crisis. Last week, the average fixed-rate mortgage rate topped 6 percent, its highest level in 14 years. Credit card borrowing costs are at their highest since 1996, according to Bankrate.com.

Inflation now appears to be increasingly being fueled by higher wages and consumers’ steady appetite for spending, rather than the supply shortages that have plagued the economy during the pandemic.

On Sunday, however, Biden said on CBS’s 60 Minutes news program that he believes a soft landing for the economy is still possible, and hinted that his administration’s recent energy and health legislation is reducing drug and healthcare prices would.

Some economists are beginning to express concern that the Fed’s rapid rate hikes – the fastest since the early 1980s – will do more economic damage than is needed to tame inflation.

Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and that wage increases – a key driver of inflation – are flattening and even declining somewhat through some measures.

Polls also show that Americans expect inflation to fall significantly over the next five years.

This is an important trend because inflation expectations can be self-fulfilling: if people expect inflation to ease, some will feel less pressure to accelerate their purchases. Less spending would then contribute to modest price increases.

Konczal said it had to be argued that the Fed should slow rate hikes over the next two meetings. “With the cooling coming,” he said, “don’t rush it.”

The Fed’s rapid rate hikes mirror steps being taken by other major central banks and add to concerns about a possible global recession.

The European Central Bank raised its key interest rate by three quarters of a percentage point last week. The Bank of England, Reserve Bank of Australia and Bank of Canada have all made sharp rate hikes in recent weeks.

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