By Jaydeep Saha, Contributing Writer, HCL Technologies Ltd. 

 

Fed up with the uncontrollable inflation that reached a 40-year high of 8.6 percent and squeezed the US economy, the Federal Reserve upped the ante in the United States’ fight to control it — it hiked interest rates by three-quarters of a percentage point, the biggest increase since 1994.

It also indicated that similar large shoot-ups could come later this year in an effort to calm down the booming economy by raising the cost of lending.

Reuters reported that this action raised the short-term federal funds rate to a range of 1.5 percent to 1.75 percent, and Federal Reserve officials projected the rate to increase to 3.4 percent by the end of this year and to 3.8 percent in 2023 — a substantial shift from projections in March that saw the rate rising to 1.9 percent this year.

Federal Reserve Chair Jerome H Powell at a press conference said: “We thought that strong action was warranted at this meeting and we delivered on that. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all… The current picture is plain to see: The labor market is extremely tight and inflation is much too high.”

Recession next year?

The WSJ further reported that the move to hike interest rates will make the price of mortgages, auto loans, and a wide array of business investments more expensive. Rising interest rates work to cool off an overheated economy by dampening consumer spending, so that demand for goods and services falls, helping bring prices down. However, investors and some businesses are newly concerned that the move to get inflation under control could cool the economy too much, triggering a new recession and a wave of layoffs. A ramped-up fight against rising prices could also usher in a wave of harsher consequences, including higher unemployment and reduced economic growth later this year, Federal Reserve leaders acknowledged.

“We don’t seek to put people out of work, of course. We never think too many people are working and fewer people need to have jobs,” Powell said. “But we also think you really cannot have the kind of labor market we want without price stability. We have to go back and establish price stability.”

Technology among summer training programs

As the White House is determined to counter growing fears about a possible recession and high inflation while highlighting employment gains, its summer-long initiative — beginning this month — will encourage labor unions and industry to work together to train more workers for good jobs in the electric vehicle, broadband, and construction sectors, senior administration officials told Reuters.

US Labor Secretary Marty Walsh, National Economic Council Director Brian Deese, National Domestic Policy Council Director Susan Rice and other top officials will meet at the White House with executives from telecoms giant AT&T; Bechtel, the largest US construction firm; Germany’s Siemens AG, union leaders and workforce experts to share ideas on how to train more workers for well-paying jobs in those sectors.

The White House will promote creation and expansion of apprenticeship and skills certification programs, while encouraging firms, state, and local governments to support workers with better access to childcare and transportation.

Biden hopeful

Meanwhile, Biden said a recession is “not inevitable” and he is confident the United States can overcome inflation. “First of all, it’s not inevitable,” Biden told AP, adding: “Secondly, we’re in a stronger position than any nation in the world to overcome this inflation.”

AP reported that some financial analysts suggested Powell struck the right balance to reassure markets. “He hit it hard that ‘we want to get inflation down’ but also hit hard that ‘we want a soft landing’,” said Robert Tipp, chief investment strategist at PGIM Fixed Income.

The Federal Reserve’s action to hike rates was an acknowledgment that it’s struggling to curb the pace and persistence of inflation, which is being fueled by strong consumer spending, pandemic-related supply disruptions and soaring energy prices that have been aggravated by Russia’s invasion of Ukraine.

However, over the next two years, the officials are forecasting a much weaker economy than the one envisioned in March. They forecast growth will be 1.7 percent this year and next. Despite these revised figures, this prediction is better than some economists’ expectation for a recession next year.