The Federal Reserve took an aggressive step on Wednesday to combat rising inflation with the announcement of another larger-than-normal, three-quarters percentage point rate hike. The rise comes as central bank officials face a difficult balancing act: lowering rising prices amid growing concerns about an economic downturn.
The latest hike brings the federal fund rate between 2.25% and 2.50%, where it was the most recent high in the summer of 2019 before the coronavirus pandemic.
This marks theof the year as consumer prices have risen at the fastest pace in more than 40 years. Five months ago, the federal fund rate was close to zero percent. At its June meeting, the Federal Open Market Committee raised Federal Funds interest rates by a more aggressive 75 basis points for the first time in nearly 30 years, after rising 25 basis points and 50 basis points respectively during its March and May meetings.
With consumer prices up more than 9% from a year ago, additional rate hikes are expected through the end of the year.Fed officials predicted the rate would rise to more than 3% by 2023. The committee will meet again in September, November and December.
The Federal Reserve said it is anticipating further rate hikes. Federal Reserve Chairman Jerome Powell said on Wednesday that another “unusually large” rate hike at the next meeting could be “appropriate,” but the committee is making that decision on a meeting-by-meeting basis, and the hikes are likely to slow. . Powell acknowledged the possibility of further increases next year.
Federal fund rate hikes have increased borrowing costs for Americans. According to Greg McBride, chief financial analyst at Bankrate.com, floating-rate debt, such as credit cards and equity lines of credit, will be most affected.
“Consumers should look to low-interest credit card transfer offers and act urgently to insulate themselves from further rate hikes and make progress in paying off debt,” McBride said. “Ask your lender if it is an option to determine the interest on your outstanding equity.”
The federal funds rate hike comes as several other key economic data are released this week. On Thursday, the Commerce Department will release its second-quarter 2022 GDP report, which could show further signs that the US is in recession after the level of economic activity declined in the first quarter of the year.
On Monday, at an event, President Biden said the US will not be in a recession, noting that the unemployment rate at 3.6% is close to pre-pandemic levels. Over the weekend, Treasury Secretary Janet Yellen, who previously chaired the Federal Reserve, acknowledged in an interview that the economy is slowing, but said it is not an economy in recession. Whether the US is in a recession is determined by the National Bureau of Economic Research. Yellen argues that the economy is in a transition period.
“I don’t think the US is in a recession right now,” Powell said. He noted that many sectors of the economy are performing ‘too well’. Powell specifically mentioned the job market and said job growth is slowing, but that is expected. “This is a very strong job market.”
The Commerce Department will also release its latest report on the June Personal Consumption Expenditure Price Index on Friday, the preferred inflation index used by the Federal Reserve.