Economists voice concerns over U.S. Fed's aggressive rate hikes

WASHINGTON/BEIJING, Nov. 3 (Xinhua) -- The U.S. Federal Reserve (Fed), bogged down in dealing with a 40-year high in inflation, announced Wednesday its fourth consecutive three-quarters of a percentage point hike in interest rates, another aggressive move causing stocks to sink and economists to bemoan economic uncertainty ahead.

The supersized rate hike brings the central bank's policy rate to a new target range of 3.75 percent to 4 percent, the highest level since January 2008.

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the Fed said in its statement published on Wednesday. "The Committee is strongly committed to returning inflation to its 2 percent objective."

"PREMATURE" TO SAY STOP

The aggressive boost in interest rates was ordered after the Fed concluded its two-day monetary policy meeting, while Fed Chair Jerome Powell warned that interest rates would have to go even higher to tame the severe inflation.

"It is very premature to be thinking about pausing. People when they hear 'lags' think about a pause. It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go," Powell told a press conference following the release of the Fed's statement.

Given the interest rate has jumped 3.75 percentage points in the last eight months, the National Public Radio (NPR) said Wednesday "that's the most aggressive string of rate hikes in decades, but so far it's done little to curb inflation."

"Interest rates have risen at a whiplash-inducing speed, and we're not done yet," Greg McBride, chief financial analyst for Bankrate.com, a personal finance website, was quoted by the NPR as saying.

"It's going to take some time for inflation to come down from these lofty levels, even once we do start to see some improvement," McBride said.

U.S. stocks fell sharply after sniffing out a whiff of higher rates to come.

The Dow Jones Industrial Average dipped 505.44 points, or 1.55 percent, to 32,147.76. The S&P 500 decreased 96.41 points, or 2.50 percent, to 3,759.69. The Nasdaq Composite Index shed 366.05 points, or 3.36 percent, to 10,524.80.

All the 11 primary S&P 500 sectors ended in red, with consumer discretionary and technology down 3.79 percent and 3.47 percent, respectively, leading the losses.

Other spluttering signs have emerged in the U.S. economy. Mortgage rates have surged to more than 7 percent -- the highest in 20 years, because of the Fed's aggressive rate hikes, experts said.

"The uncertainty and volatility in financial markets is heavily impacting mortgage rates," Sam Khater, Freddie Mac's chief economist, was cited by local media as saying.

Esther George, president of the Federal Reserve Bank of Kansas City, said the high inflation should be contained, while warning against increasing rates too rapidly at a time of economic uncertainty.

"I have been in the camp of steadier and slower (rate increases), to begin to see how those effects from a lag will unfold," George said last month. "A series of very super-sized rate increases might cause you to oversteer and not be able to see those turning points."

A growing number of Democrats also voiced their concerns on the Fed's approach, warning that aggressive hikes could put millions of people out of work.

"We are deeply concerned that your interest rate hikes risk slowing the economy to a crawl while failing to slow rising prices that continue to harm families," U.S. Senator Elizabeth Warren, a Democrat, and colleagues wrote in a letter Monday to Powell.

RIPPLE EFFECT

The Fed's decision came as a slew of governments around the world have been grappling with a surging cost of living crisis. Many economists cautioned that the Fed's belligerent move would push the U.S. and the global economy into a recession.

European residents have been confronted with soaring cost of living and declining real purchasing power, which have dented their confidence in consumption.

Surging food prices have pushed inflation over 10 percent in Britain. The European Central Bank in October increased its cost of borrowing to tackle inflation, now at a record high of 10.7 percent.

At the same time, the surge in energy cost has also led to a drop in industrial output and the shutdown of some energy-intensive companies, leaving more adverse effects on the European economy.

UK consumer confidence continued to bump, with all core measures remaining severely depressed, Joe Staton, client strategy director at market research company GfK, said in late October.

"Households are not just running scared of burgeoning energy and food prices, and the prospect of further base rate rises increasing mortgage costs. They are now facing the likelihood of tax rises and even austerity measures," Staton said.

Indian markets traded flat after dropping slightly in early trade on Thursday, following a huge fall in global markets, local media reported.

"Indian markets are likely to open gap down tracking weak global cues as investors react to Fed's decision on raising interest rates by 75 basis points and on hints by the Fed that interest rate hikes may continue in the future, increasing the likelihood of the U.S. economy entering into a recession," said a report by ICICIdirect Research.

"There are growing concerns that efforts to corral inflation by making borrowing and mortgages more expensive will accelerate countries' slide into recession, choking off investment and increasing unemployment," The New York Times reported on Tuesday.

Analysts at UBS Global Wealth Management said in a note on Wednesday that it is "too early to expect the Fed to signal a more dovish stance," as the U.S. labor market "remains tight" and the Fed "has yet to see evidence of cooling inflation."

"The economy is slowing, but unlikely fast enough to prompt a policy pivot," said UBS analysts.