Federal Reserve Makes Another Supersized Rate Increase to Tame Inflation

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

Fed officials voted unanimously at their July meeting for a second consecutive super-interest rate hike — a three-quarter point move — and signaled that another major correction could be coming. at the next meeting in September, though that has yet to be decided. Wednesday’s decision puts the Fed’s policy rate in the range of 2.25 to 2.5%.

The central bank’s swift moves are aimed at slowing the economy by making it more expensive to borrow money to buy a home or expand a business, weighing on the housing market and business activity. economy on a broader scale. Jerome H. Powell, the Fed Chairman, said in a press conference after the meeting that such cooling is needed for supply to catch up with demand for inflation to correct.

Mr. Powell acknowledged that the Fed’s policy changes are likely to cause some economic pain – particularly weakening the labor market. That has made the central bank’s rate hike unwelcome to some Democrats, who argue that destroying the economy is a crude way to lower the current rate of inflation. . However, the Fed Chair emphasized that today’s economic sacrifice is needed to get the US back on a sustainable path in the long term given its slow and predictable rate of price growth.

“We need growth to slow down,” Mr. Powell said. “We don’t want this number to be larger 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.”

Stocks rallied after the Fed decision and Mr. Powell’s press conference. Some rate strategists have asked why, because Mr. Powell’s comments are consistent with the message that Fed officials repeatedly send: Inflation is too high, the central bank is determined to strangle it, and interest rates are likely to increase further this year.

“There is a lot of news between now and the September meeting and I think the market will reassess,” said Priya Misra, head of Global Rate Strategy at TD Securities. “This is a Fed that is even more data dependent — and it will come down to see if inflation gives them space to slow down.”

The Fed started raising interest rates from near zero in March, and policymakers have ramped up their pace aggressively since the response to incoming economic data, as price hikes continue to accelerate. at the alarm level.

After starting to make the 1/4 point move, the central bank raised interest rates by half a point in May and three-quarters of a point in June, the biggest single step since 1994. Institutions may continue to raise rates rapidly in September, or they may slow them down, depending on how the economy develops.

“We could do another unusually large rate hike,” Mr. Powell said on Wednesday. “But that’s not the decision we made.”

Mr. Powell said the likely path of rate hikes the Fed outlined earlier this year – with rates rising to around 3.5% this year – remained reasonable. The Fed will likely raise borrowing costs to “at least a moderate amount,” where they are actively weighing on the economy, he said.

But the mere recognition that growth is cracking and growth will eventually slow down was enough to appease investors. The S&P 500 stock index ended the day up 2.6% and the Nasdaq Composite posted its best day since April 2020. However, markets can quickly change their rhythm. The last two times the Fed raised interest rates, the S&P 500 rose on the day of the announcement, only falling a day later.

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

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

Consumer prices increase 9.1 percent during the year to June, with costs rising rapidly across a wide range of goods and services, from food and fuel to rent and dry cleaning.

The Fed will receive a new reading of its preferred inflation measure, the Personal Consumption Spending index, on Friday. That report likely confirmed a more timely signal sent by the Consumer Price Index: Inflation accelerated in June, rising at its fastest pace in decades.

Inflation is likely to slow somewhat in July, as gasoline prices have fallen significantly this month. Even so, officials will be watching closely in the coming months for signs of widespread and prolonged price decline.

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

The central bank’s latest hike comes on a day when Democrats appear to have reached an agreement in the Senate on a bill to push prescription drug prices and electricity emissions lower, while reducing the federal deficit. state – a bill President Biden called “a bill to fight inflation and reduce costs for American families”.

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

If people and businesses start adjusting their behavior in anticipation of rising prices – with workers demanding higher wages and companies passing on their escalating costs and expenses to customers – Inflation may become a more permanent feature of the economy.

When inflation became ingrained in the 1980s, the Fed, trying to overcome it, eventually raised interest rates to double digits and caused successive recessions that pushed up the unemployment rate. over 10 percent. The Fed in 2022 does not want a repeat.

“Doing too little and leaving the economy in this inflationary state only increases costs,” Mr. Powell said.

The United States is not alone in conducting a campaign against rapid price increases. Inflation has speed around the world as the pandemic disrupted supply chains and as Russia’s war in Ukraine disrupted fuel and food markets. Many central banks are raising interest rates to slow their own economies, hoping to bring prices back under control.

In the United States, growth has shown signs of weakening as the Fed’s moves start to get rough and as inflation weighs on families’ pockets. The housing market is cooling down rapidly as high mortgage rates are driving away will be the buyer and discourage builders from starting to build new homes. Some measures of spending and consuming also suggested to reduce the speed: Walmart said this week that inflation has pressured consumers to buy fewer goods. Consumer psychology has been defeated and many economists have begun to predict at least a mild recession.

Mr. Powell made it clear that, while he sees some signs of cooling off, 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,” Mr. Powell said.

That’s partly because the labor market remains strong, with the unemployment rate at 3.6% – near a 50-year low. New data sets released on Friday are expected to show that job compensation is rising rapidly, though not fast enough to keep up with current rapid inflation.

The Fed had hoped that, because the labor market was starting from such a strong place, it would be able to slow down the economy enough to start pushing inflation lower without hurting it to the point where it was. caused a wave of job losses. But central bankers also stress that achieving that outcome can be difficult.

“Our goal is to reduce inflation and have a so-called soft landing,” Mr. Powell said. “We are trying to achieve that. I have said many times that we understand it will be quite challenging and it has become increasingly difficult in recent months. “

The Fed chair repeatedly backtracked on the idea that while the central bank’s response can be painful, the rapid price increase is also a punitive measure.

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

Joe Rennison and Jim Tankersley contributed reporting.