US Fed hikes lending rate by 75 basis points

The US Federal Reserve hiked its target lending rate today by another 75 basis points and reiterated its resolve to keep raising rates until it succeeds in tamping down inflation.

The Federal Open Market Committee (FOMC) raised its federal funds rate to a range of 3-3.25pc from 2.25-2.5pc and said it "anticipates" further increases in the target range would be "appropriate."

The rate hike was the Fed's third such increase in four months and followed a half point hike in May and a quarter point increase in March from levels near zero put in place to boost demand when the start of the Covid-19 pandemic in early 2020 triggered a sharp, brief recession.

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic," higher food and energy prices, and broader price pressures, the FOMC said at the end of a two-day meeting, repeating much of the language from its prior statement in July. It said the war in Ukraine "and related events are creating additional upward pressure on inflation" and are hurting the global economy.

The Fed has warned that its course of monetary tightening, the steepest in decades, could cause "pain" to households and businesses as it tries to bring down inflation running near four-decade highs. By raising the federal funds rate, an inter-bank overnight lending rate that has a knock-on effect across consumer and business lending rates, the Fed increases borrowing costs and lowers demand for big ticket items like cars and homes to rein in pricing pressures.

Already the US economy has contracted for two quarters in the first half of the year, but an unusually robust labor market, with unemployment near 50-year lows, suggests the economy could still avoid sliding into recession.

By Robert Willis