Federal Reserve Makes Another Supersized Rate Increase to Tame Inflation

The Federal Reserve (Fed) continued its rapid rate hike campaign on Wednesday, pushing up borrowing costs at the fastest pace in decades to keep inflation under control.

At its July meeting, Fed officials unanimously voted in favor of a second consecutive mega rate hike. Wednesday’s decision puts the Fed’s policy rate in the 2.25-2.5% range.

Central bank action is aimed at slowing the economy by making it more expensive to borrow money to buy a home or expand a business, putting pressure on the housing market and economic activity more broadly. Fed Chairman Jerome H. Powell said in a post-meeting press conference that such a cooldown is necessary for supply to catch up with demand so that inflation eases.

Mr. Powell conceded that the Fed’s policy change is likely to do some damage to the economy. In particular, the weakening of the labor market. That is why central bank rate hikes are unwelcome among some Democrats, he argues, and that crushing the economy is a crude way to keep inflation down today. But the Fed chairman stressed that today’s economic sacrifice was necessary to get America back on a sustainable long-term path with slow and predictable price increases.

“We need to slow growth,” Mr. Powell said. “I don’t want this to get any bigger than it needs to be, but ultimately, in the medium to long term, price stability is what makes the economy as a whole work.”

Stocks soared after the Fed’s decision and Mr. Powell’s press conference. Some rate strategists asked why. Mr. Powell’s comments were in line with messages consistently sent by Fed officials. Inflation is too high, the Fed is determined to crush it, and interest rates are likely to rise further this year.

“We have a lot of information between now and our September meeting and I think the market will reassess,” said Priya Misra, head of global rates strategy at TD Securities. “This is a more data-dependent Fed, depending on whether inflation gives room to slow down.”

The Fed started raising interest rates from near zero in March. Policy makers have since picked up the pace sharply as inflation continues to accelerate at an alarming rate in response to incoming economic data.

The central bank launched a 1/4 point move before raising rates by 0.5 points in May and 3/4 points in June. This was his biggest step since 1994. Or it could slow down depending on how the economy develops.

Mr. Powell said on Wednesday that the Fed “could again raise rates by an unusually large amount.” “But that’s not the decision we made.”

Mr. Powell said the likely path for interest rates outlined by the Fed earlier this year, rising to about 3.5% this year, remains plausible. The Federal Reserve is likely to raise borrowing costs to “at least moderately restrictive levels,” in which case it will put pressure on the economy more aggressively, he said.

But the mere realization that economic growth was slowing and rate hikes would eventually slow was enough to appease investors. recorded the highest value of The last two Fed rate hikes have seen the S&P 500 rise the day they were announced and then fall the day after.

“At some point, it would be appropriate to slow down,” Mr. Powell said. “We will be guided by data.”

For now, the data remains a concern, at least when it comes to inflation.

Consumer prices rose 9.1% in the year to June, sharply increasing the cost of goods and services ranging from food and fuel to rent and dry cleaning.

The Federal Reserve Board new reading of the Personal Consumption Expenditure Index, the preferred inflation indicator on Friday. That report could confirm the signal sent by the more timely consumer price index. Inflation was very rapid in June, rising at its fastest pace in decades.

Inflation will probably ease somewhat in July as gas prices have fallen significantly this month. That said, officials will be watching closely for signs of a broad and sustained price slowdown in the months ahead.

The Federal Reserve (Fed) is the country’s main responder when it comes to inflation, but the White House is also trying to help as much as it can.

The central bank’s latest rate hike came on a day when Democrats appeared to have reached agreement in the Senate on a bill meant to push down prices for prescription drugs and low-emission electricity while simultaneously reducing the federal deficit. rice field. A bill to combat inflation and lower the cost of American families. “

Still, central bankers are nervous that after more than a year of rapid cost changes, Americans will begin to expect inflation to continue if it isn’t brought back soon.

If people and firms began to adjust their behavior in anticipation of higher prices, workers would demand higher wages, firms would pass on rising costs and expenses to their customers, and inflation would become a more permanent feature of the economy. It may become

When inflation took hold in the 1980s, the Fed tried to overthrow it, eventually raising interest rates to double-digit levels, triggering a series of recessions and pushing up unemployment. 10 percent or more.. The 2022 Federal Reserve doesn’t want a repeat.

“Too little action and leaving the economy with entrenched inflation will only add to the costs,” Mr. Powell said on Thursday.

The United States is not the only country campaigning against sharp price increases. Inflation is accelerating around the world as pandemics disrupt supply chains and the Russian war in Ukraine disrupts fuel and food markets. Many central banks are raising interest rates to slow their economies and hope to bring prices back under control.

In the US, growth is already showing signs of slowing as the Fed’s actions start to take hold and inflation itself weighs on household budgets. The housing market is cooling rapidly as high mortgage rates alienate would-be buyers and discourage builders from building new homes. Some measures of consumer spending also suggest a slowdown. Walmart said this week that inflation is putting pressure on consumers to buy less goods. Consumer sentiment is deteriorating, and many economists are beginning to predict at least a mild recession.

Powell said he doesn’t believe the U.S. is in recession yet, although there are signs of a recession.

“I think it is unlikely that the U.S. economy is currently in recession,” Powell said.

One reason is that the labor market remains strong, with the unemployment rate at 3.6%, near the lowest level in 50 years. A new data set released on Friday is expected to show employment compensation rising rapidly, though not nearly keeping up with today’s rapid inflation.

With the labor market starting so strong, the Fed can slow the economy enough to start lowering inflation without hurting the economy enough to spur a wave of job losses. I expected. But central bankers also stress that achieving that result may be difficult.

“Our goal is to bring inflation down and have what we call a soft landing,” Powell said. “We are trying to get there. I’ve said it many times.”

The Fed chairman repeatedly returned to the idea that while the central bank’s response may be painful, a sharp rise in prices is also a punishment.

Low-income people go to the grocery store and “suffer” because they know their salary doesn’t cover the food they usually buy, he said. and that’s why we’re so serious about keeping inflation under control.”

Joe Rennison and Jim Tankersley contributed to the report.