The US Federal Reserve has raised interest rates by half a point to the highest level in 15 years

The Fed has raised rates seven times this year. (Representative)

Washington:

The Federal Reserve ramped up its all-out drive to tame US inflation on Wednesday, raising the benchmark lending rate by half a percentage point, as its policy actions rippled through the economy.

The US central bank has taken aggressive steps to dampen demand in the world’s biggest economy, raising rates seven times this year, with interest-sensitive sectors such as housing already grappling with tighter policy.

Its latest takes the growth rate to 4.25-4.50 per cent, the highest since 2007.

But officials signaled that their fight to cool the US economy is far from over.

A statement from the Fed’s policy-setting Federal Open Market Committee (FOMC) said “the committee anticipates that ongoing increases in the target range would be appropriate” to reach a restrictive stance sufficient to rein in inflation.

The committee estimates that its interest rate next year will be higher than previously estimated.

On Wednesday, policymakers also slashed their forecast for US economic growth in 2023 to 0.5 percent, to avoid contraction, and see inflation rising more than anticipated.

While it takes time for policy effects to ripple through sectors, there have been positive signs, with consumer inflation easing in the United States in November.

The consumer price index, a key gauge of inflation, posted its smallest annual increase in nearly a year, fueling optimism that the Fed may soon ease its efforts.

Wall Street shares edged higher on Wednesday as Asian indices edged higher as all eyes turned to the Fed’s post-meeting statement and comments from Fed Chair Jerome Powell for hints on the way forward.

Households have been squeezed by red-hot prices following Russia’s invasion of Ukraine, rising food and energy costs and the fallout from China’s zero-Covid measures.

To make borrowing more expensive, the Fed has raised interest rates seven times, including four bumper 0.75-point increases.

The downgrade was widely expected by analysts on Wednesday, but it’s a sharp jump nonetheless.

In a recent note, Ian Shepherdson of Pantheon Macroeconomics cautioned that Powell “is in no rush to say what markets want to hear.”

“(Powell) is unlikely to deviate from his clear line that the Fed will do whatever is necessary to reduce inflation, and some pain will be necessary,” Shepherdson said in an analysis.

– ‘No evidence yet’ –

The recent easing in data is welcome news for policymakers, but it is “not yet evidence that inflation has cooled to levels consistent with a persistent inflation target,” warned Unicredit Bank economist Edoardo Campanella in a note.

The Fed has a long-term target of 2 percent, while consumer inflation rose year-over-year to 7.1 percent in November.

“The Fed will likely slow the pace of rate hikes to 25 basis points early next year,” Campanella said.

“However, the labor market is still very tight … and with broader financial conditions easing, the Fed will probably say their work is not done,” he said.

Neil Saunders, GlobalData’s managing director, said the Fed is taking an “aggressive approach on inflation” and that further tightening will be needed, based on the continued strength of underlying demand in the economy.

“While this action may have the desired effect, it will cool the economy at a time when it is already under pressure in 2023,” Saunders said.

Nationwide chief economist Cathy Bosjanic said in a note on Monday that further rate hikes by the Fed would mark “a new phase” in its tightening cycle.

It comes as officials look to adjust the policy now that it is “within the range considered restrictive.”

He said financial markets would be watching for signs of higher rates, and “way beyond that peak for rates”.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)