The US Federal Reserve has raised interest rates by three-quarters of a percentage point on Wednesday, continuing its aggressive campaign to cool rapid inflation even as the economy begins to slow.
Central bankers voted unanimously to make the unusually large interest rate move, and the policy-setting Federal Open Market Committee (FOMC) signalled in its post-meeting statement that more is coming, saying that it “anticipates that ongoing increases in the target range will be appropriate.”
The Fed’s policy rate, which trickles out through the economy to effect other borrowing costs and curtail growth, is now set to a range of 2.25 to 2.5 per cent. The Fed began raising interest rates from near-zero in March, and policymakers have picked up the pace since.
After making a quarter-point move to start, they raised by half a point in May and by three-quarters of a point in June, which was the largest single step since 1994. Fed officials made a second supersized increase on Wednesday because they are trying urgently to wrestle abnormally rapid inflation back under control. While officials acknowledged in their statement that spending and production data have “softened,” they also pointed out that job gains have been “robust” and that prices continue to increase quickly, “reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures”.
Consumer prices climbed 9.1 per cent in the year through June, and central bankers are nervous that, after more than a year of rapid cost rise, Americans might begin to expect inflation to last. If people and businesses start to adjust their behaviour in anticipation of rising prices — with workers asking for higher wages, and companies passing their climbing costs expenses through to customers — that could make inflation a more permanent feature of the economy.
Indian stocks
Back home, a divergent trend prevailed in the markets ahead of the crucial Federal Reserve meeting, with the Sensex rising almost 548 points and the rupee declining 12 paise against the US dollar to 79.90. The 30-share Sensex ended at 55816.32, a rise of 547.83 points or nearly 1 per cent, while the broader Nifty finished 157.95 points up at 16641.80.
The gains came amid a risk-on sentiment as a 75 basis points hike by the US central bank is already factored in, apart from reasonable valuations in certain pockets. Market circles added that a positive trend in the European markets also aided the rally.
“Indian market will react to global trends in-line with FOMC meeting outcome. We are in a rally during the last one and half months assuming that much is factored in the price. “The market has not factored in a recession as valuation continues to trade marginally above the longterm trend. Value buying should be the essence of investment till the risk of a recession subsides,” Vinod Nair, head of research at Geojit Financial Services, said.
(New York Times News Service and our Mumbai bureau)
