WASHINGTON (AP) – The Federal Reserve stepped up its fight against high inflation on Wednesday, raising its key interest rate by three quarters – the biggest increase since 1994 – and signaling more interest rate hikes in the future as it tries to calm the US economy without to cause recession.
The unusually high interest rate hike came after data released on Friday showed US inflation rose to a four-decade high of 8.6% last month – a sudden jump that made financial markets worry about how it would react. the Fed.  The Fed’s short-term benchmark, which affects many consumer and business loans, will now be tied in the range of 1.5% to 1.75% – and Fed policymakers predict that range will double by the end of the year. year.
“We believed in the need for strong action at this meeting and we did it,” Fed Chairman Jerome Powell told a news conference, stressing the central bank’s commitment to doing whatever it takes to reduce inflation at the Fed’s interest rate target. 2.%.  Reaching this point, he said, could lead to slightly higher unemployment as economic growth slows.
Powell said there was an urgent need to go beyond the half-point increase previously signaled by the Fed because inflation was higher than expected – making it particularly difficult for low-income Americans.  Another concern is that the public expects higher and higher inflation in the future, which can become a self-fulfilling prophecy by accelerating spending among consumers seeking to avoid price increases for certain goods.
The central bank has revised its policy statement to acknowledge that its efforts to curb inflation will not be painless, removing the previous language that Fed officials expect “the labor market to remain strong”.
“It will be a much more difficult path to reduce inflation than previously expected,” said Matthew Luzzetti, chief US economist at Deutsche Bank.
Fed officials predict that unemployment will rise this year and next, reaching 4.1% in 2024 – a level that some economists said would risk a recession.
However, Powell has relied heavily on previous assurances that – with unemployment nearing five decades, wages rising and consumer finance largely stable – the economy can withstand higher interest rates and avoid recession.
“We are not trying to cause a recession now,” he said.  “It simply came to our notice then.  We are trying to achieve 2% inflation “.
Powell said another three-quarters increase is likely at the next Fed meeting in late July if inflationary pressures remain high, although he said such increases would not be common.
Some financial analysts suggested that Powell struck the right balance to reassure markets, which rose on Wednesday.  “It hit hard that ‘we want to reduce inflation,’ but it also hit hard that ‘we want a gentle landing,'” said Robert Tipp, chief investment strategist at PGIM Fixed Income.
However, the Fed’s action on Wednesday was a recognition that it is struggling to contain the pace and persistence of inflation fueled by strong consumer spending, pandemic-related supply disruptions and rapidly deteriorating energy prices. from the Russian invasion of Ukraine.  .
Inflation has peaked in the months leading up to the midterm elections, hurting public opinion on the economy, weakening President Joe Biden’s approval ratings and increasing the chances of a Democrat losing in November.
Biden tried to show that he recognizes the pain of inflation in American households, but he struggled to find political action that could make a real difference.  The president stressed his belief that the power to curb inflation rests primarily with the Fed.
However, the Fed’s rate hike is a blunt tool in trying to reduce inflation while sustaining growth.  Shortages of oil, gasoline and food contribute to higher prices.  Powell said several times during the press conference that such factors are beyond the control of the Fed and could force it to push interest rates even higher to ultimately reduce inflation.
Borrowing costs have already risen sharply in much of the US economy in response to the Fed’s move, with the average fixed 30-year mortgage rate exceeding 5%, its highest level since the 2008 financial crisis, since just 3% in the beginning.  of the year.
In their updated forecast on Wednesday, Fed policymakers said that after this year’s rate hikes, they forecast two more rate hikes by the end of 2023, when they expect inflation to eventually fall below 3%, close to the level their goal.  However, they expect inflation to remain at 5.2% at the end of this year, much higher than expected in March.
For the next two years, officials predict a much weaker economy than envisioned in March.  They forecast growth of 1.7% this year and next year.  This is lower than their outlook for March, but better than some economists expect for a recession next year.
Even if the Fed manages to trick inflation into a slump without causing a recession, higher interest rates will put pressure on equities.  The S&P 500 has already sunk more than 20% this year, meeting the bear market definition.
On Wednesday, the S&P 500 rose 1.5%.  The two-year bond yield fell to 3.23% from 3.45% late Tuesday, with the biggest move as Powell said he did not expect interest rate hikes by three-quarters of a percentage point to be normal.
Other central banks are also trying to stifle inflation, even with their nations at greater risk of recession than the US
The European Central Bank is expected to raise interest rates by a quarter in July, the first rise in 11 years.  It could announce a bigger increase in September, if record levels of inflation persist.  On Wednesday, the ECB pledged to create a market backstop that could protect member states from the kind of financial turmoil that erupted during a debt crisis more than a decade ago.
The Bank of England has raised interest rates four times since December to a 13-year high, despite forecasts that economic growth will remain unchanged in the second quarter.  The BOE will hold an interest rate meeting on Thursday.