Federal Reserve Raises Rates to Clamp Down on Inflation

Federal Reserve officials raised interest rates by 75 basis points for the second straight month, delivering the most aggressive tightening in more than a generation to curb surging inflation—but risking a sharp blow to the economy.

The federal funds rate target range was raised by policymakers on Wednesday due to the highest price pressure in over 40 years. It is now at 2.25%-2.5%. That takes the cumulative June-July increase to 150 basis points—the steepest rise since the price-fighting era of Paul Volcker in the early 1980s.

The Federal Open Market Committee “is strongly committed to returning inflation to its 2% objective,” it said in a statement released in Washington, repeating previous language that it’s “highly attentive to inflation risks.” The FOMC reiterated it “anticipates that ongoing increases in the target range will be appropriate,” and that it would adjust policy if risks emerge that could impede attaining its goals.

After the decision, stocks in the United States remained at their highest levels. In short term, Treasury yields increased and the dollar declined.

The FOMC vote, which included two new members—Vice Chair for Supervision Michael Barr and Boston Fed President Susan Collins — was unanimous. Barr’s addition to the board earlier this month gave it a full complement of seven governors for the first time since 2013.

At 2:30 pm in Washington, Chair Jerome Powell will host a press conference to discuss his decision.

Criticised for not recognizing inflation and taking too long to respond to it, officials now have to raise interest rates in order to cool the economy. Even if this means that it may tip the economy into recession.

The U.S. economy is already feeling the effects of higher interest rates. These effects can be seen in particular the housing market where sales are slowing.

While Fed officials maintain that they can manage a so-called “soft landing” for the economy and avoid a steep downturn, a number of analysts say it will take a recession with mounting unemployment to significantly slow price gains.

The FOMC noted Wednesday that “recent indicators of spending and production have softened,” but also pointed out that job gains “have been robust in recent months, and the unemployment rate has remained low.”

The latest increase puts rates near Fed policy makers’ estimates of neutral — the level that neither speeds up nor slows down the economy. In mid-June, officials predicted that rates would rise to 3.4% this year and to 3.8% by 2023.

Now investors are watching to see if Fed members slow down the rate of interest increases in September or whether strong price gains force central banks to increase rates even more.

According to Wednesday’s pricing in interest rate futures contracts, traders expected a half-point increase at the September 20-21 FOMC Meeting. The traders see rates reaching a peak of 3.4% at year’s end, with cuts occurring in the second quarter 2023.

In June, the US consumer price index grew by 9.1% from one year ago. This was higher than forecasts and a new four-decade record. Price gains are harming earnings, causing discontent and creating problems for President Joe Biden (and congressional Democrats) ahead of the midterm election.

There was speculation at first that high inflation would fuel Fed interest in raising rates by one percent this month. But these bets have been canceled as Fed officials voiced concern. Key readings about consumer expectations of future inflation showed that they were higher than predicted.

All around the world, central banks are fighting rising prices. In a surprise move earlier in the month, the Bank of Canada increased rates by one full percentage point. The European Central Bank made a half-point increase that was larger than expected. It is the first rate hike in more then a decade.

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