Tough action on interest rates in the US. But how rattled is the US Federal Reserve?

theguardian.com:

The ghost of Paul Volcker is haunting Washington today after the US Federal Reserve announced it was stepping up the fight against inflation with an aggressive 0.75 percentage point increase in interest rates.

Four decades ago – the last time the annual increase in the American cost of living was higher than its current 8.6% – Volcker became legendary as the central banker who was prepared to drive the world’s biggest economy into deep recession to squeeze inflation out of the system.

Now the present chair of the Federal Reserve, Jerome Powell, has discovered his own inner Volcker. Last year Powell was insistent that rising US inflation was a “transitory” phenomenon. Just last month he said a 0.75 point jump in official borrowing costs was not on the table.

Now it looks as if a rattled Fed is playing catch-up. Powell and his colleagues were taken aback by last Friday’s report showing the unexpected 8.6% rise in annual inflation.

The latest Fed thinking is that inflation risks becoming embedded because demand is too strong for a supply side damaged by the pandemic and the war in Ukraine.

In what appeared to be an officially approved tipoff, the Wall Street Journal reported this week that the Fed would, after all, be considering a 0.75 point increase in rates at the meeting this Wednesday.

The Fed said the move, which pushes US rates to between 1.50% and 1.75%, would be followed by further increases. Wall Street is now fully braced for a further 0.75 point rise in borrowing costs next month and a 0.5 point rise in September.

The Fed’s change of tack has implications for the US and for the rest of the world. There are already some indications – Wednesday’s drop in retail sales, for instance – that higher inflation is taking its