New York, United States of America- The Federal Reserve has raised its benchmark interest rate by 0.75 percentage points, bringing the Federal rate to a range of 3 percent and 3.25 percent, the highest level since early 2008.
Speaking at a congressional hearing on Wednesday, some of the US’ top bankers said it was too early to tell how the interest rate would impact the economy.
“I think there’s a chance, not a big change, a small chance, of a soft landing. There is a chance of a mild recession, a chance of a hard recession, and because of the war in Ukraine and the uncertainty in global energy and food supply, there is a chance that it could be worse. I think policymakers should be prepared for the worst, so we take the right actions if and when that happens,” said Jamie Dimon, chief executive of JPMorgan Chase.
The Central Bank’s action on Wednesday, followed a government report last week that showed high costs spreading more broadly through the economy, with price spikes for rents and other services worsening even though some previous drivers of inflation, such as gas prices, have eased.
However, by raising borrowing rates, the Federal Reserve makes it costlier to take out a mortgage or an auto or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.
Federal officials now see the economy expanding just 0.2 percent this year, sharply lower than its forecast of 1.7 percent growth just three months ago, and it expects sluggish growth below 2 percent from 2023 through 2025.
Meanwhile, the Dollar hit a new 20-year high on Wednesday. An index measuring the greenback against six peers added as much as 0.6 percent in early London dealings to reach the highest level since 2002. The Pound dropped 0.4 percent to US$1.133 and the Euro lost 0.7 percent to consolidate below parity at US$0.99.
“The Dollar is rallying more aggressively against the Euro than the Pound given that the Bank of England on Thursday is expected to follow the Fed with a similarly hawkish rate increase. The interest rate differential allure of the Dollar post the Fed is only likely to last one day against the Pound if we see a similar (0.75 percentage point) hike from the Bank of England,” said Victoria Scholar, head of investment at Interactive Investor.
