KUALA LUMPUR: After its most recent meeting last week, the federal open market committee of the Federal Reserve System of the United States decided to raise the short-term interest rate with which the Fed (America's central bank) lends to major financial institutions by another 0.75 percent. This was the third time in a row that the Fed announced a 0.75-percent hike in interest rate, bringing the US interest rate to more than 3 percent. In a bid for policy transparency, as has become the norm for the Fed in recent years, Jerome Powell, the Fed chairman, went so far as to set a target interest rate of 4.6 percent for next year. This series of blunt rate hikes was, of course, meant to tame the continuously high inflation rate in the US; it was, granted, not as high as the previous 8 percent and above, but it still lingered around the 6-percent range. And even that, at least for the Fed, was an unacceptably high inflation rate.

The Fed also frankly predicted the US growth rate for this year to be at most only around 0.2 percent, and may even slip into the negative range, precipitating another round of recession. As for unemployment, the figure may also jump from 3 to 4 percent. At least on the surface and in principle, these predictions highlight a degree of policy dilemma on the part of the Fed. For modern economics theories dictate that if the economy exhibits signs of slowing down or slipping into recession, especially when the unemployment figure is climbing — as was predicted by the Fed itself above — the central bank concerned should actually lower and not raise interest rates. This is mainly because a lower interest rate would correspondingly lower the borrowing costs of businesses, and businesses would thus be more willing to take out loans from financial institutions to expand their business frontiers. As for individuals with disposable income, when they see that the interest rates for their bank savings are going low, they would instead opt to spend their money, which shores up consumption that in turn stimulates the economy, or even speculate in the stock or property markets that could 'bubble up' the economy, albeit for a short while and often with dire consequences. As such, why would the Fed present a gloomy economic outlook for America, but at the same time utilize an economic intervention tool that seemed, at least at first glance, counter-intuitive?