Battle to tame inflation is not over, warns US Federal Reserve

The Federal Reserve last night paused its most aggressive round of interest rate rises since the 1980s, but stopped short of declaring victory in the fight against inflation.

The US central bank decided to hold its target steady at 5pc to 5.25pc rather than opting for an 11th straight increase to borrowing costs.

Stronger growth expectations for the world’s largest economy prompted its rate-setters to suggest two more interest rate rises were still likely, taking markets by surprise.

The Fed chairman Jerome Powell said: “Inflation has moderated somewhat since the middle of last year.

“Nonetheless inflation pressures continue to run high, and the process of getting inflation back down to 2pc has a long way to go.”

The Fed’s policymakers revised their interest rates expectations to 5.6pc for the end of the year from previous forecasts of 5.1pc.

The central bank also doubled its forecasts for growth to 1pc in 2023 and 1.1pc the following year.

Despite the hawkish tone, the decision to stop raising borrowing costs stands in stark contrast to the UK’s struggles to tame rampant inflation.

The Bank of England is poised to lift rates by 0.25 percentage points to 4.75pc in its 13th consecutive hike next week amid persistently high price rises and red-hot wage growth.

The Fed’s pause comes after a string of economic data released over the past two weeks pointed to higher borrowing costs starting to tame price pressures.

Producer inflation, which measures prices charged by wholesalers, fell by more than expected from 2.3pc to 1.1pc in May, figures released on Wednesday showed.

Consumer price inflation also dropped sharply in May to 4pc from 4.9pc, lifting expectations that the Fed’s job is close to being done.

Mr Powell said however that the “extraordinary resilience” of the labour market had “surprised many, if not all analysts over the last couple of years”.

The central bank now expects unemployment to reach 4.1pc at the end of the year rather than 4.5pc.

Seema Shah, chief global strategist at Principal Asset Management, said the hawkish stance suggested the Fed was “ clearly trying to avoid a 1970s-style resurgence in inflation”.

The Fed started its hiking cycle three months later than the Bank in March last year.

However, it has been more forceful than Threadneedle Street, which has raised borrowing costs by 4.4 percentage points since December 2021.

The European Central Bank is expected to raise rates by 0.25 percentage points tomorrow.