The Federal Reserve raised interest rates by 0.75% on Wednesday as the central bank tries to avoid a deep recession.
The decision to move by 0.75% matched the magnitude of the Fed’s last move in June, which was its biggest rate hike at a meeting since 1994. Wednesday’s decision was agreed by unanimity by the voting members of the Federal Open Market Committee.
The Fed has now moved at four consecutive meetings to raise borrowing costs in America, expanding its effort to reduce spending by households and businesses. The goal: to fight inflation at rates not seen since the early 1980s.
Short-term borrowing rates are now between 2.25% and 2.50%, comparable to 2019 levels.
“Recent indicators of spending and output have softened,” the Fed said in its policy announcement.
“However, job gains have been robust in recent months and the unemployment rate has remained low. Inflation remains elevated, reflecting pandemic-related supply-demand imbalances, increased of food and energy prices and broader price pressures.”
The Fed again said it “anticipates that continued increases in the target range will be appropriate.”
Inflation readings over the summer have yet to show an abatement of inflationary pressures. In June, US prices rose 9.1% year-on-year, the fastest pace since November 1981.
Balancing act
Fed policymakers have said one driver of high inflation remains the war in Ukraine, where economic sanctions have pushed up global energy prices. But Fed officials have acknowledged that the rapid pace of domestic price increases is also the result of demand spurred by its pandemic-era low-rate policy.
These inflationary factors will make it difficult for the Fed to achieve its immediate goal of reducing inflation without causing large job losses. A June reading on the labor market showed the unemployment rate at a relatively low 3.6%, almost near pre-pandemic lows.
The story continues
As the Fed raises borrowing costs, concerns are growing that reduced economic activity will force businesses into layoffs. The FOMC continued to call job gains “robust,” while inflation “remains elevated.”
Wednesday’s interest rate hike also comes a day before the release of government data on economic growth in the second quarter of the year. After a quarter of negative growth in the first quarter, a second consecutive negative reading may further cement concerns that the US economy is already in recession.
But uncertainty over the speed and magnitude of rate hikes has fueled a flurry of speculation about how far the Fed can raise rates, before a deterioration in economic activity forces the Fed to cut rates.
The same central bank’s projections from June estimate that the Fed will need to raise rates to 3.8% next year to achieve a slowdown in inflation, although those forecasts may now be outdated.
The Fed’s efforts to unwind its pandemic-era stimulus also involve unwinding some of the assets it bought in 2020 and 2021. The Fed on Wednesday made no changes to a previously announced plan to to relaxation, which will increase the pace of its assets are reduced to about 95 billion dollars a month from September.
At the start of the year, the Fed’s asset holdings totaled about $9 trillion.
The Fed will release updated economic projections alongside the next policy announcement scheduled for September 21.
Federal Reserve Board Chairman Jerome Powell speaks to reporters in Washington, U.S., June 15, 2022. REUTERS/Elizabeth Frantz
Brian Cheung is a reporter covering the Fed, economics and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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