THE US central bank has raised interest rates to the highest level in 22 years, as it fights to stabilise prices in the world’s largest economy by creating the conditions for a major slump.
The decision lifted the Federal Reserve’s influential benchmark rate to a range of 5.25% to 5.5%, the eleventh increase since early 2022, when the Fed started raising borrowing costs to try to cool the economy and ease price inflation by means of a slump.
‘We’re going to be going meeting, by meeting,’ bank chairman Jerome Powell said at a press conference following the announcement, adding: ‘It is certainly possible that we would raise the Fed’s rate again at the September meeting if the data warranted!’
Wednesday’s decision came ahead of central bank meetings in Europe and Japan which are also expected to raise their interest rates.
In the UK, where inflation was 7.9%, the Bank of England is widely expected to commence with a series of rate rises to replace the current Bank rate of 5%.
Inflation in the US was 3% in June. That was down from a peak of more than 9% last year, when prices were rising at the fastest pace in four decades.
The Fed has already brought interest rates up from near zero less than 18 months ago, putting to an end an era of low-cost borrowing that started during the financial crisis, and preparing the way for more banking collapses and a major slump.
The moves that have hit the public in the form of more expensive loans for homes, business expansions and other activity are now to be accelerated.
The bourgeois theory is that more rate rises will slash borrowing and replace out of control inflation with a major economic collapse and an unemployment catastrophe for the workers of the world.
Bank Chairman Jerome Powell said that he expected the jobs market to weaken further and for growth to slow more before the Fed could be really confident its job was being done.
He admitted: ‘It’s not that we’re aiming to raise unemployment but we have to be honest about the historical record.’
While acknowledging progress, he also noted that so-called core inflation – which does not include food and energy prices – remained more than double the Fed’s 2% inflation target.
Andrew Patterson, senior economist at Vanguard, said the Fed was worried about declaring victory prematurely, mindful of mistakes made in the 1960s and 1970s, when bank leaders embraced signs that inflation was easing only to see the problem flare up again.
‘They had a positive inflation report this past month but … they’re going to want to see more of that going forward before they’re comfortable,’ he said. ‘They’re not going to take anything off the table or pin themselves into a corner.’
David Henry, investment manager at Quilter Cheviot, said the Bank of England and European Central Bank were ‘much further behind’ than the US on controlling inflation, which could lead to a ‘bifurcation’ or division in policy among developed economies.
‘They would love to have the luxury that the Fed has in declaring the job nearly done, but instead talk is of rates of 6%, if not more,’ he said.
He added: ‘There is a chance the US begins talking about rate cuts before the BoE has had a chance to pause and assess the impact of its actions, and this would have a significant impact on stock and bond prices on both sides of the Atlantic.’
In a statement after its latest policy meeting, the Fed said that while the banking system is ‘sound and resilient’, the upheaval in the financial system could slow borrowing, spending and growth. It reiterated that the impact of pull-back in bank lending ‘remains uncertain’.
The Fed’s rate increases over the past 14 months have more than doubled mortgage rates, elevated the costs of car loans, credit card borrowing and business loans and heightened the prospect of a slump. Home sales have plunged as a result.
Already three large banks have collapsed. Major banking collapses are now on the way.
There is only one way out of this crisis for the workers of the world. That is to build sections of the International Committee of the Fourth International worldwide to replace capitalism with the victory of the world socialist revolution!
