The Federal Reserve took an aggressive step on Wednesday to combat soaring inflation by announcing another larger-than-usual interest rate hike of three-quarters of a percentage point. The increase comes as central bank officials face a difficult balancing act: driving down prices amid growing fears of an economic slowdown.
The latest increase takes the federal funds rate to between 2.25% and 2.50%, where it was at its most recent high in the summer of 2019 before the coronavirus pandemic.
This marks theof the year, with consumer prices rising at the fastest rate in more than 40 years. Five months ago, the federal funds rate was close to zero percent. At its June meeting, the Federal Open Market Committee raised the federal funds rate 75 basis points more aggressively for the first time in nearly 30 years after increases of 25 basis points and 50 basis points during March and May meetings, respectively.
With consumer prices up more than 9% from a year ago, further rate increases are expected through the end of the year.Fed officials have projected the rate to rise to over 3% by 2023. The committee will meet again in September, November and December.
The Federal Reserve has signaled that it anticipates further rate hikes. Federal Reserve Chairman Jerome Powell said Wednesday that another “abnormally large” rate hike at the next meeting might be “appropriate,” but the committee makes that decision meeting by meeting, and then it would be likely increases are slowing down. Powell acknowledged the possibility of further increases next year.
The increase in the federal funds rate has resulted in higher 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 the most affected.
“Consumers should turn to low-rate credit card balance transfer offers and do so urgently to protect themselves from further rate increases and make progress in paying down debt,” McBride said. “Ask your lender if it’s possible to fix the interest rate on your home’s equity balance.”
The hike in the fed funds rate comes as several other key economic data are expected to be released this week. On Thursday, the Commerce Department will release its GDP report for the second quarter of 2022, which could still show signs that the United States is in a recession after the measure of economic activity fell in the first quarter of the year.
On Monday, President Biden said at an event that the United States would not be in a recession, noting that the unemployment rate was near its pre-pandemic level at 3.6%. Over the weekend, Treasury Secretary Janet Yellen, who also served as chair of the Federal Reserve, acknowledged in an interview that the economy is slowing but said it was not a growing economy. recession. Whether the United States is in a recession is determined by the National Bureau of Economic Research. Yellen argues that the economy is in a period of transition.
“I don’t think the United States is in a recession right now,” Powell said. He noted that many sectors of the economy were performing “too well”. Powell specifically mentioned the labor market, saying job growth is slowing, but that is expected. “It’s a very strong labor market.”
The Commerce Department will also release its latest Personal Consumption Expenditures Price Index report for June on Friday, the preferred gauge of inflation used by the Federal Reserve.