US Federal Reserve signals plans to hike interest rates to cool rising inflation
The US Federal Reserve last night signalled plans to speed up interest rate hikes amid rising inflation.
After a two-day meeting, the central bank’s policy committee held interest rates at near-zero and kept in place a huge bond-buying programme.
But officials signalled they expect rates to increase twice by the end of 2023, compared to previous expectations they would stay the same until 2024.
Inflation fears: Chairman of the US Federal Reserve Jerome Powell (pictured) said inflation has been higher and more persistent than expected
The decision comes as the US economy has been running hot ever since coronavirus restrictions were lifted.
Fed chair Jerome Powell said: ‘Inflation has been higher and more persistent than expected.’ However, he insisted recent big jumps in inflation are only ‘transitory’.
The comments rattled investors and sent US stocks falling, with the Dow Jones index dropping 0.7 per cent and the S&P 500 by 0.5 per cent.
Stocks and other assets have been boosted by the Fed’s support – including a £85billion per month bond-buying programme – which has made borrowing cheap.
The moves by the Fed to tighten up monetary policy could put pressure on the Bank of England to follow suit next week, when its monetary policy committee meets.
Fed officials said they expect the US economy to grow by 7 per cent this year, up from March’s estimate of 6.5 per cent. They hiked their estimate for inflation from 2.4 per cent to 3.4 per cent.
Debate is raging about when and how quickly to raise interest rates in the US and UK. Some economists warn the current rock-bottom rates combined with massive government stimulus risk overheating the economy.
But central banks are trying to balance the need to let businesses recover from the pandemic and for employment to bounce back.
Concerns about inflation have come into particular focus after May’s reading in the US showed a rise of 5 per cent – the fastest pace since the financial crisis.
In the UK, official figures also showed that inflation jumped to 2.1 per cent in May, the highest figure for two years.
Andy Haldane, the Bank’s chief economist, has warned that waiting too long to hike rates risks ‘rises that are larger and faster than anyone would expect or want’.
In the US, the Fed’s support for the economy is being compounded by more than £3.5trillion in stimulus measures passed by the US Congress.
And President Joe Biden’s administration is planning a massive infrastructure package that could bring more spending, stoking fears that the economy could overheat.