- The Washington Times - Wednesday, May 4, 2022

The Federal Reserve raised a key interest by half a point on Wednesday to combat soaring inflation, a move that critics say came too late and that some economists say now risks a recession.

The central bank raised its benchmark interest rate by one-half of a percentage point — the largest hike since at least 2000. It was the second time in as many months that the Federal Reserve has raised rates in hopes of tamping down runaway inflation.

Inflation has surged 8.5% since last year, the highest recorded level since 1981. The price hikes have delivered a stunning blow to Americans’ pocketbooks and put President Biden and congressional Democrats on the spot to do something or face retribution from voters at the ballot box in November.

Federal Reserve Chairman Jay Powell and the central bank’s Board of Governors cited the economic fallout of Russia’s invasion of Ukraine and the lingering effects of the COVID-19 pandemic.

At a press conference, Mr. Powell took the unusual step of saying the central bank’s officials understood the financial pain that high inflation is causing Americans. He stressed that the Fed is sharply raising rates for that very reason: to rein in high inflation, sustain the economy’s health and ease the stress that millions of households are facing.

“Inflation is much too high,” he said, “and we understand the hardship it is causing.”

SEE ALSO: Biden touts efforts to reduce the federal deficit, says they will improve the economy

Mr. Powell made clear that more big rate hikes are coming, likely an additional half-point increase at the Fed meeting in June and July. He also sought to downplay speculation that the Fed might be considering a rate hike as high as three-quarters of a percentage point.

“A [three-quarters of a point] hike is not something that the committee is actively considering,” he said — a remark that caused stock indexes to jump. 

The Dow Jones Industrial Average soared 932 points, or 2.8%, for its best single-day gain since May 2020. The Nasdaq and S&P500 both jumped nearly 3%.

In their statement, the central bank’s policymakers noted that Russia’s invasion of Ukraine is worsening inflation pressures by increasing oil and food prices. It added that “COVID-related lockdowns in China are likely to exacerbate supply chain disruptions,” which could further boost prices.

Apart from raising interest rates, the Federal Reserve is moving to reduce its $9 trillion holdings, mainly consisting of U.S. mortgage and Treasury bonds. Those holdings grew significantly during the height of the COVID-19 pandemic as the central bank bought up U.S. securities to keep interest rates at record lows. 

By reducing them now, the Fed is pressuring financial institutions to raise the costs associated with furnishing loans and credit to consumers. The result will mean that Americans will be forced to shell out more money in interest for mortgages, auto loans and credit card debt.

Alfredo Ortiz, president of the conservative business advocacy group Job Creators Network, said the rate hike won’t end all the economic pain.

“Rising interest rates will help tame historic inflation. Yet higher borrowing costs also hurt consumers, entrepreneurs and the overall economy,” Mr. Ortiz said.

Wednesday’s announcement is the second of six planned interest rate hikes the Federal Reserve has slated for this year. Some say the rate hikes are already late given that inflation hit a 40-year high last month and is showing no signs of slowing. 

Gasoline prices alone have jumped 48% over the past year. Meanwhile, food prices increased by 8% and housing costs rose 5%. 

Similarly, electricity and home heating prices are up more than 13% over last year, compared with 11.5 % for electricity and 21.6% for natural gas. Natural gas powers almost 40% of all electricity generated in the U.S, according to the Energy Information Administration. 

Republican lawmakers blame Mr. Biden’s policies for rising inflation. They note that the White House’s $1.9 trillion coronavirus relief package, signed into law in 2021, flooded the economy with extra money as the nation was facing a supply chain crisis.

“If the Biden administration truly wants to find the cause of record-high inflation, all they have to do is look in the mirror,” said Sen. Lindsey Graham of South Carolina, the top Republican on the Senate Budget Committee.

Mr. Biden defended his stewardship of the economy during a White House press event earlier in the day. He stressed that his policies would help pay down the national debt and reduce the costs of goods and services.

“All the talk about the deficit from my Republican friends — I love it,” the president said. “I reduced it by $350 billion in my first year in office. We are on track to reduce by the end of September by $1.5 trillion, the largest drop ever.”

The Fed’s decision to raise the interest rate is likely to complicate those plans. Interest rate hikes affect the economy across the board, including the U.S. government, which will be paying more interest on its long-term debt. 

The higher interest rate paid by the government also means the overall debt figure will increase in the short term.

Economists also fret that the aggressive interest rate hikes will trigger a recession. Bank of America warned its clients last month that the economy, wracked by supply chain issues and an overly generous COVID-19 relief package, appears primed to enter a tailspin as interest rates climb.

“Over the past 75 years, every time inflation has exceeded 4% and unemployment has been below 5%, the U.S. economy has gone into recession within two years,” former Treasury Secretary Larry Summers warned in a recent Washington Post op-ed. “Today, inflation is north of 6% and unemployment is south of 4%.”

Such talk complicates the political environment for Mr. Biden and congressional Democrats heading into the November midterms. Democrats already were expected to face a tough political environment. 

History shows that the White House’s incumbent party generally loses seats during the first midterm of a new presidency, but the economic situation is likely to amplify those losses.

“Joe Biden came into office with an economy that was strong and in the process of roaring back after the pandemic,” said Sen. Ted Cruz, Texas Republican. “He implemented policies that were nothing short of disastrous.” 

• This article is based in part on wire service reports.

• Haris Alic can be reached at halic@washingtontimes.com.

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