The U.S. Federal Reserve is ready for another massive interest rate hike this week after recent data showed an alarming picture of inflation in the U.S., confirming the central bank needs to continue its aggressive action, AFP writes.
Soaring prices have driven annual inflation to a 40-year high, hurting U.S. consumers and businesses, despite a welcome drop in gasoline prices in recent weeks.
Last week's disappointing consumer price report for August showed that housing, food and health care costs continue to rise. And volatile food and energy prices aside, so-called core inflation has accelerated.
Families are struggling with rising prices, driven initially by strong demand, as the world's largest economy emerged from a pandemic amid supply disruptions. The situation has been exacerbated by Covid store closures in China and rising energy and food prices due to the situation around Ukraine.
Policymakers are worried not only about the current high inflation, but also about the fear that consumers and businesses will begin to expect price increases to become permanent, which could lead to a dangerous spiral and a phenomenon called stagflation.
This fear has prompted the Fed to start raising rates early, instead of following the more usual course of small, gradual steps over a long period of time.
The U.S. central bank has raised the benchmark lending rate four times this year, including two consecutive three-quarter-point hikes in June and July.
The goal is to raise borrowing costs and cool demand - and it's paying off, with home mortgage rates exceeding six percent for the first time since 2008.
A third massive rate hike is expected Wednesday at the conclusion of the Fed's two-day meeting. Some believe the U.S. central bank may take an even bigger step.
But there are growing fears that aggressive action could lead the U.S. economy into a recession that would affect the rest of the world.
Fed Chairman Jerome Powell has made it clear that a recession is a risk he is willing to take. In fact, it is a risk the central bank must take to avoid an even worse outcome: a repeat of the pernicious, runaway inflation of the 1970s and early 1980s.
Powell's predecessor in the last era of high inflation, Paul Volcker, was forced to go to extremes after rising prices took root, resumed and surpassed the peak of the mid-1970s after repeated failed attempts to quell them.
This led to a deep recession and unemployment in excess of 10%.
The Fed's goal is to avoid the very high social costs of the Volcker era and maintain public confidence in the central bank's commitment to fighting inflation.
Although recent data showed that annual U.S. inflation slowed slightly to 8.3% in August - from a peak of 9.1% in June - prices actually accelerated slightly this month, reflecting widespread price increases.
Many economists now consider a recession likely.
Former U.S. Treasury Secretary Lawrence Summers is one of those who warns that unemployment must rise to bring inflation under control.
He also advocates more aggressive action by the Fed.
