The Fed raises rates by 0.75 points for the second consecutive month

The Federal Reserve raised its benchmark policy rate by 0.75 percentage points for the second consecutive month on Wednesday as it doubled down on its aggressive approach to rein in soaring inflation despite early signs that the U.S. economy was starting to to run out of steam.

At the end of its two-day policy meeting, the Federal Open Market Committee raised the target range for the federal funds rate from 2.25% to 2.50%.

The decision, which received unanimous support, extended a series of interest rate hikes that began in March and gained momentum as the Fed’s battle to fight inflation wore on. intensifies.

The rate hike means the central bank is in the throes of the most aggressive monetary tightening cycle since 1981. It follows a half-point hike in May and a 0.75 percentage point hike the month last – the first of this magnitude since 1994.

With inflation at its fastest pace in more than four decades, further rate hikes are expected well into the second half of 2022, but the pace of those increases is hotly debated.

Economists are split on whether the Fed will implement another 0.75 percentage point rate hike at its next meeting in September or opt for a lower half-point hike.

At a news conference following the decision, Fed Chairman Jay Powell said as the central bank continues to tighten policy “it will likely become appropriate to slow the pace of increases” as policymakers assess how rate hikes affect the economy and inflation.

The remarks prompted a rally in the market, with the blue-chip S&P 500 index rising 2.6% and the tech-heavy Nasdaq gaining 4.1%. The two-year Treasury yield, which moves with interest rate expectations, was 0.08 percentage points lower at 2.97%.

Ashish Shah, chief investment officer at Goldman Sachs Asset Management, said: “We are past the peak of ferocity. . . their forward speed will be slower.

However, Powell said the Fed would move to a “meeting-by-meeting” approach to setting policy and that “another unusually large increase may be appropriate” at the September meeting. He added that the committee “would not hesitate” to implement an ever steeper hike if the economic data warranted it.

James Knightley, chief international economist at ING, said: “Inflation remains the Fed’s number one priority and they are willing to sacrifice growth to achieve it.”

The Fed chairman warned that a period of slower growth and a weaker labor market might be needed to bring down high inflation, but he dismissed the suggestion that the United States is already in a recession.

“The United States is not currently in a recession, and the reason for that is that there are simply too many sectors of the economy that are working too well,” he said, although he added that avoiding one had become more difficult.

The central bank changed its assessment of the economy, noting that “recent spending and output indicators have softened,” a more pessimistic outlook than last month when it said “economic activity appears[ed] picked up”.

Powell reiterated that allowing inflation to become “entrenched” would be a worse outcome than acting too aggressively, adding: “Price stability is what makes the whole economy work.”

The fed funds rate is expected to reach around 3.5% this year, a level that will more actively limit economic activity.

Central bank policymakers want to see a slew of monthly inflation readings decelerate, but economists warn that may not happen for months, at least for ‘core’ readings eliminating volatile items such as food and energy.

In June, basic goods and services recorded an alarming jump of 0.7%, led by a sharp rise in rents and other housing costs and other expenses that are expected to remain high in the fall.

The Fed raised rates just a day before the release of gross domestic product figures, which could show a second consecutive quarter of contraction in economic growth. That would meet one of the common criteria for a technical recession, but Powell on Wednesday pointed to other signs of economic strength — including the robust labor market — to challenge the notion.

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