The Federal Reserve made another supersized rate hike to curb inflation

WASHINGTON – The Federal Reserve continued its campaign of rapid interest rate hikes on Wednesday, raising borrowing costs at the fastest pace in decades in an effort to keep inflation under control.

Fed officials at their July meeting voted unanimously for a second consecutive supersized rate hike – a three-quarter-point move – and indicated that another major adjustment could come at their next meeting in September, although it decided left to go. Wednesday’s decision puts the Fed’s policy rate in the range of 2.25 to 2.5 percent.

The central bank’s sharp moves are aimed at slowing the economy by making it more expensive to borrow money to buy a home or expand a business, weighing down the housing market and economic activity more broadly. Fed Chairman Jerome H. Powell said during a news conference after the meeting that such a cool-down was needed to allow supply to catch up with demand so that inflation could subside.

Mr Powell acknowledged that the Fed’s policy changes are likely to cause some economic pain – in particular, weakening the labor market. This has made central bank rate hikes unwelcome among some Democrats, who argue that crushing the economy is a crude way to lower today’s inflation rate. But the Fed chairman stressed that today’s economic sacrifice was necessary to get the US back on a sustainable long-term path with slow and predictable price growth.

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

Shares rose after the Fed’s decision and Mr. Powell’s news conference. Some rate strategists asked why, as Mr. Powell’s comments align with the message from Fed officials: Inflation is 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 market will reevaluate,” said Priya Mishra, head of global rates strategy at TD Securities. “It’s an even more data-dependent Fed — and it’s going to come down to whether inflation gives them room to slow down.”

The Fed began raising interest rates to near-zero in March, and policymakers have gathered pace since the reaction to incoming economic data, as price increases continue to rise at an alarming rate.

After taking a quarter-point move to begin with, the central bank raised a half-point in May and three-quarters of a point in June, the biggest single move since 1994. Officials could raise rates sharply in September, or they could reduce the pace, depending on how the economy develops.

“We could have another unusually large rate hike,” Mr Powell said on Wednesday. “But it’s not a decision we’ve made.”

Mr Powell said the likely path to interest rates the Fed pointed out earlier this year – in which rates rose by about 3.5 per cent this year – remains reasonable. The Fed will raise borrowing costs to “at least a moderately restrictive level” at which they are more actively weighing the economy, he said.

But the mere recognition that growth is cracking and rate hikes will eventually slow down was enough to make investors happy. The S&P 500 stock index ended the day up 2.6 percent, and the Nasdaq Composite posted its best day since April 2020. However, markets can quickly change their tune. The last two times the Fed has raised rates, the S&P 500 has rallied on the day of the announcement, only to fall a day later.

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

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

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

Fed will get a new reading Your favorite inflation measure, the Personal Consumption Expenditure Index, on Friday. The report is likely to confirm the signal sent by the more timely consumer price index: Inflation was very sharp in June, rising at the fastest pace in decades.

Inflation will probably slow down somewhat in July, as gas prices have come down significantly this month. Nevertheless, officials will be watching closely in the coming months for signs of a widespread and continued bearishness in prices.

The Fed is the nation’s main responder when it comes to inflation, but the White House is also trying to help where it can.

The central bank’s latest escalation came on a day Democrats appeared in the Senate to reach an agreement on a bill aimed at slashing the price of drugs and low-emission electricity, while also reducing the federal deficit — a presidential Biden said “a”. Bill to fight inflation and lower costs for American households.

Still, central bankers are nervous that, after more than a year of rapid cost changes, Americans may begin to expect inflation if it is not eased quickly.

If people and businesses begin to adjust their behavior in anticipation of rising prices – with workers demanding higher wages, and companies passing their climbing costs and expenses on to customers – inflation could become a more permanent feature of the economy. Is.

When inflation took root in the 1980s, the Fed, trying to quell it, eventually raised interest rates to double-digit levels and provoked back-to-back recessions that pushed up the unemployment rate. above 10 percent, 2022 The Fed does not want to repeat.

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

The United States is not alone in campaigning against rapid price increases. inflation is quick around the world As the pandemic has hit supply chains and as Russia’s war in Ukraine has disrupted fuel and food markets. Many central banks are raising interest rates to slow their economies, which is expected to bring prices under control.

In the United States, growth has already shown signs of weakening as the Fed’s moves begin to bite and inflation weighs on the family pocketbook. The housing market is cooling off rapidly as fears rage over higher mortgage rates buyers will be and discourage builders from starting new homes. some measures of consumer expenditure Recession suggestion: Walmart said this week Inflation was putting pressure on consumers to buy fewer goods. consumer sentiment tanking is done And many economists are beginning to predict at least a mild recession.

Mr. Powell was clear that, while he is seeing some signs of cooling, he does not think America is in recession.

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

That’s partly because the labor market remains strong, with unemployment at 3.6 percent – near the lowest level in 50 years. The latest data to be released on Friday is expected to show that employment compensation is rising fast, though not fast enough to keep pace with today’s sharp inflation.

The Fed is hoping that, because the labor market is starting from such a strong place, it will be able to slow the economy enough to spur inflation without hurting it enough to trigger a wave of job losses. . But central bankers have also stressed that achieving that result may be difficult.

“Our goal is to reduce inflation and make a so-called soft landing,” Mr. Powell said. “We’re trying to achieve that. I’ve said on several occasions that we understand it’s going to be pretty challenging, and it’s gotten more challenging in recent months.”

The Fed chairman repeatedly returned to the idea that while the central bank’s response can be painful, rapid price increases are also punishing.

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

Joe Rennison and Jim Tankersley contributed reporting.

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