The Federal Reserve took a bold step on Wednesday to combat soaring inflation by announcing another larger-than-usual rate hike, three-quarters of a percentage point in rate hikes. The increase comes as central bankers face a difficult balancing act: cutting high prices amid growing fears of an economic slowdown.
The latest increase brings the federal funds rate to between 2.25% and 2.50%, its highest level in the summer of 2019 before the coronavirus pandemic.
This representsThis year, consumer prices rose at the fastest pace in more than 40 years. Five months ago, the federal funds rate was close to zero percent. At its June meeting, the FOMC raised the federal funds rate by a more aggressive 75 basis points for the first time in nearly 30 years after increasing it by 25 basis points and 50 basis points at its March and May meetings, respectively.
With consumer prices up more than 9% from last year, additional price increases are expected through the end of the year.Federal Reserve officials expected the rate to rise to more than 3% by 2023. The committee will meet again in September, November and December.
The Fed has indicated that it expects an additional rate hike. Federal Reserve Chairman Jerome Powell said on Wednesday that another “extraordinarily large” rate increase at the upcoming meeting may be “appropriate,” but the committee makes that decision with a meeting, after which increases are likely to slow. Powell acknowledged the possibility of increasing the increases next year.
Increases in the federal funds rate have raised borrowing costs for Americans. According to Greg McBride, chief financial analyst at Bankrate.com, variable rate debt such as credit cards and home equity lines of credit will be affected the most.
“Consumers should look at low-rate credit card balance transfer offers and do so urgently to protect against further rate increases and make progress in paying down debt,” McBride said. “Ask your lender if setting an interest rate on your outstanding equity balance is an option.”
The Fed funds rate hike comes as several other key economic data are due this week. On Thursday, the Commerce Department will release its report on gross domestic product for the second quarter of 2022, which may show more signs that the United States is in recession after a gauge of economic activity declined in the first quarter of the year.
On Monday, President Biden said during an event that the United States will not be in a recession, noting that the unemployment rate is approaching the pre-pandemic level of 3.6%. Over the weekend, Treasury Secretary Janet Yellen, who also previously served as chair of the Federal Reserve, acknowledged in an interview that the economy is slowing but said it’s not an economy in a recession. Whether the United States is in a recession is determined by the National Bureau of Economic Research. Yellen says the economy is in transition.
“I don’t think the United States is currently in a recession,” Powell said. He noted that many areas of the economy are doing “very well”. Powell specifically referred to the job market, saying job growth is slowing but that’s to be expected. “This is a very strong job market.”
The Commerce Department will also release its latest June PCE price index report on Friday, the Fed’s preferred inflation measure.
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