The Fed must not lose the plot

In a widely anticipated move, the United States Federal Reserve has raised the interest rate – its 10th hike in just a little over a year – leaving the funds rate at a target range of 5 per cent to 5.25 per cent. This is the highest in nearly 16 years. The rate increase suggests that the Fed continues to see inflation as the main threat to the world’s biggest economy, and will not pause until it brings it down to 2 per cent or less, thought to be the optimum to maintain demand that will soak up underutilised labour and resources. 

The Fed’s move comes amid cross-currents in the US economy. The jobs market is seeing different pulls, with manufacturing contracting even as the services sector on the whole continues to expand. While several technology and financial institutions have trimmed staff, the widespread layoffs that typically point to a recession have not materialised. Indeed, the economy added a higher-than-expected 253,000 non-farm jobs in April. Thus, on balance, the Fed probably believes it has room to quieten inflation without killing growth. Still, some analysts see a recession looming and even the Fed has hinted at a pause in the tightening cycle.