The Fed is making another big rate hike to tame inflation

The Federal Reserve continued its campaign to raise interest rates rapidly on Wednesday, raising borrowing costs at the fastest pace in decades in an effort to control inflation.

Federal Reserve officials voted unanimously at their July meeting on the second consecutive rate increase – a move of three-quarters of a point – and indicated that another major adjustment could come at their next meeting in September, although that has yet to be decided. Wednesday’s decision puts the Fed rate in a range of 2.25 to 2.5 per cent.

The central bank’s quick moves are aimed at slowing the economy by making it more expensive to borrow money to buy a home or expand a business, which is throwing weight on the housing market and economic activity more broadly. Jerome H. said: Powell, Federal Reserve Chairman, told a news conference after the meeting that such a cooling is necessary to allow supply to keep pace with demand so inflation can moderate.

Mr. Powell acknowledged that changes in Fed policy are likely to cause some economic pain – in particular, weakening the labor market. That has made the central bank’s hikes unwelcome among some Democrats, who argue that squashing the economy is a crude way to lower inflation today. But the Fed chief stressed that today’s economic sacrifice was necessary to return America to a sustainable long-term path with slow and predictable price increases.

“We need the growth to slow,” Powell said. “We don’t want this to be bigger than it needs to be, but in the end, if you think about the medium to long term, price stability is what makes the entire economy work.”

Stocks rose after the Fed’s decision and Mr. Powell’s press conference. Some interest rate strategists have questioned why, because Powell’s comments are in line with the message Fed officials have consistently sent: Inflation is too high, the central bank is determined to crush it, and interest rates are likely to rise further this year.

“There is a lot of information between now and the September meeting, and I think the markets will reassess,” said Priya Misra, head of global price strategy at TD Securities. “This Fed is more data dependent – and will go back to whether inflation gives them room to slow down.”

The Fed began raising interest rates from near zero in March, and policymakers have raised the pace sharply since then in response to incoming economic data, as rate increases continue to accelerate at an alarming rate.

After taking a quarter-point move to begin, the central bank raised rates by half a point in May and three-quarters a point in June, which was the single largest move since 1994. Officials could continue to raise rates quickly in September, or they could ease the pace, depending on on how the economy is developing.

“We may do another extraordinarily large increase,” Powell said on Wednesday. “But that’s not a decision we ever made.”

Powell said the likely interest rate path set by the Fed earlier this year – with rates rising to about 3.5 per cent this year – remains reasonable. He said the Fed was likely to raise borrowing costs to “at least a moderately restrictive level” as it weighs more actively on the economy.

But just recognizing that growth was collapsing and that rate increases would eventually slow was enough to satisfy investors. The S&P 500 stock index ended the day 2.6 percent higher, and the Nasdaq Composite had its best day since April 2020. However, markets can quickly change their tune. The last time the Fed raised rates, the S&P 500 rose on the day of the announcement, but fell back the next day.

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

For now, the data – at least when it comes to inflation – remains worrisome.

Consumer prices increased by 9.1 percent In the year through June, costs rise rapidly across a range of goods and services, from food and fuel to rent and dry cleaning.

The Federal Reserve will get new reading of the preferred inflation measure, the Personal Consumption Expenditure Index, on Friday. This report is likely to confirm the timely signal sent by the CPI: Inflation was very rapid in June, rising at the fastest pace in decades.

Inflation is likely to slow somewhat in July, because gas prices have fallen significantly this month. However, in the coming months, officials will be watching closely for signs of a broad and continuing slowdown in prices.

The Federal Reserve is the nation’s primary responder when it comes to inflation, but the White House is also trying to help where possible.

The central bank’s latest increase came on the day Democrats appeared to have reached agreement in the Senate on a bill aimed at lowering the price of prescription drugs and low-emission electricity, while also reducing the federal deficit — one President Biden called a “bill to fight inflation and cut costs for families.” American”.

However, central bankers worry that after more than a year of rapid changes in cost, Americans may begin to expect inflation to continue if it is not reduced quickly.

If people and companies begin to adjust their behavior in anticipation of higher prices — with workers demanding higher wages, and companies shifting up costs and expenses to customers — inflation could become a more permanent feature of the economy.

When inflation became ingrained in the 1980s, the Fed tried to beat it, eventually raising interest rates to double-digit levels and triggering successive recessions that pushed up the unemployment rate. above 10 percent. The 2022 Fed does not want to repeat that.

“Doing too little and leaving the economy with this entrenched inflation increases costs,” Powell said on Wednesday.

The United States is not alone in cracking down on rapid price increases. Inflation has rushing around the world The pandemic has disrupted supply chains and Russia’s war in Ukraine has disrupted fuel and food markets. Many central banks are raising interest rates in order to slow their economies, hoping to bring rates back under control.

In the US, growth is already showing signs of weakness as the Fed’s moves begin to take a toll, and while inflation itself is affecting household finances. The housing market is slowing down rapidly while high mortgage rates are frightening potential buyers and discourage builders from starting new homes. some metrics Consumer expenses We also suggest a slowdown: Walmart said this week Inflation was pressuring consumers to buy fewer goods. Consumer confidence Refueling Many economists are beginning to expect at least a mild recession.

Mr. Powell was clear that while he sees some signs of cooling, he doesn’t think America is still in a recession.

“I don’t think it’s likely that the US economy is in a recession right now,” Powell said.

This is partly because the labor market remains strong, with the unemployment rate at 3.6% – close to a 50-year low. New data due for release on Friday is expected to show that payouts are rising rapidly, albeit not fast enough to keep pace with today’s rapid inflation.

The Fed had hoped that, given the labor market starts from such a strong place, that it would be able to slow the economy enough to start pushing inflation down without hurting it so much that it leads to a wave of job losses. But central bankers also emphasized that achieving this outcome could be difficult.

“Our goal is to bring down inflation and get what’s called an easy landing,” Powell said. We are trying to achieve that. I have said on many occasions that we understand that this is going to be very difficult, and that it has become even more difficult in recent months.”

The Fed chair has repeatedly returned to the idea that while a central bank response can be painful, rapid rate increases are also punishment.

Low-income people are “suffering,” he said, going to the grocery store and knowing their salaries don’t cover the food they usually buy. “It’s very unfortunate and that’s why we’re really committed to lowering inflation.”

Joe Rennison and Jim Tankersley contributed reporting.

Related Articles

Back to top button