US steps up fight against inflation

America’s central bank sent ripples through global markets as it hinted interest rate rises could now come thick and fast.

In a sign the pandemic era of cheap money is over, the Federal Reserve said it may raise its rates by 0.5 percentage points at a time – larger than the gradual 0.25 percentage point hike it would usually employ.

It is also winding down its money-printing programme to tame inflation, which is at a 40-year high.

Fed Chair Jerome Powell eyes faster hiking cycle 

But it is feared that aggressive rate rises could push the world’s biggest economy into recession, as higher borrowing costs encourage households and businesses to save rather than spend.

The Fed last month lifted rates for the first time in more than three years, to a range of 0.25pc to 0.5pc. In minutes from that meeting of officials, released last night, it said: ‘The invasion of Ukraine by Russia is causing tremendous human and economic hardship.

‘The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.’

To keep prices down, the central bank will sell the trillions of bonds it bought during the pandemic, at a rate of around $95bn, or £73bn, per month.

The Fed more than doubled its holdings to around $9trillion as Covid hit, to inject money into the economy. This week Fed governor Lael Brainard said: ‘It is of paramount importance to get inflation down.’

But the hints that it will rapidly tighten monetary policy rattled investors. Stocks slid as they predicted the cost of borrowing would rise, eating up future profits. The Dow Jones index fell by 0.5pc, and the S&P 500 by 1pc.

The yield on the US 10-year Treasury note – effectively what investors get paid in interest when they buy government debt – rose to 2.6pc, a three-year high, indicating traders think rates will rise further. The Fed comments came a day after Agustin Carstens, general manager of the Bank for International Settlements, said the world was on the ‘cusp of a new inflationary era’.

Central banks are racing to keep a lid on price rises by raising interest rates. But that risks halting growth. Economists at Deutsche Bank predict that the US will tumble into a recession next year, as the Fed bumps up rates at each of its next three meetings to above 3.5pc by mid-2023.

In a note to clients, Deutsche’s David Folkerts-Landau and Peter Hooper said: ‘The US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024.’ They admitted their predictions were currently way out of line with their peers, but added: ‘We expect it will not be so for long.’

Germany also faces recession –defined as two consecutive quarters of falling output – if Europe cuts off gas and oil supplies from Russia. It is heavily reliant on fuel supplies from Russia.

Christian Sewing, the Deutsche boss, noted that banks expect Germany to grow around 2pc this year. He said: ‘The situation would be even worse if imports or supplies of Russian oil and natural gas were to be halted.

‘A significant recession would then be virtually unavoidable.’

This post first appeared on Dailymail.co.uk