The Federal Reserve took an aggressive step to combat rising inflation on Wednesday by announcing another three-quarters of a percentage point rate hike, larger than usual. The hike comes as central bank officials face a difficult balancing act: cutting soaring prices amid growing concerns of an economic slowdown.
With the latest hike, the federal funds rate is between 2.25% and 2.50%, hitting its last high before the coronavirus pandemic in the summer of 2019.
This is the fourth rate hike of the year as consumer prices rose at their fastest pace in over 40 years. Five months ago, the federal funds rate was near zero percent. At its June meeting, the Federal Open Market Committee raised the federal funds rate by a more aggressive 75 basis points for the first time in nearly 30 years, after raising it by 25 basis points and 50 basis points at the March and May meetings, respectively.
With consumer prices up more than 9% year-on-year, further price increases are expected through the end of the year. At their meeting last month, Fed officials forecast interest rates would rise above 3% by 2023. The Committee will meet again in September, November and December.
The Federal Reserve signaled that it expects more rate hikes. Federal Reserve Chair Jerome Powell said on Wednesday that another “unusually large” rate hike at the next meeting might be “appropriate,” but the committee makes that decision meeting by meeting, and it would then likely change increases would slow. Powell acknowledged the possibility of more hikes over the next year.
Federal Reserve Board Chairman Jerome Powell speaks during a news conference in Washington, DC July 27, 2022. MANDEL NGAN/AFP via Getty Images
Federal Funds Rate increases have resulted in higher borrowing costs for Americans. According to Greg McBride, chief financial analyst at Bankrate.com, variable-rate debt like credit cards and home equity lines of credit will be hit the hardest.
“Consumers should urgently look for low-interest credit card balance transfer offers to protect themselves from further interest rate hikes and make progress on paying down debt,” McBride said. “Ask your lender if fixing the interest rate on your outstanding home equity loan is an option.”
The Federal Funds Rate hike comes as several other key economic data figures are due out this week. On Thursday, the Commerce Department is due to release its report on GDP for the second quarter of 2022, which could show further signs that the US is in recession after the level of economic activity slowed in the first quarter of the year.
On Monday, during an event, President Biden said the US will not be in a recession, noting that the unemployment rate is 3.6%, close to pre-pandemic levels. Over the weekend, Treasury Secretary Janet Yellen, who was also previously Chair of the Federal Reserve, acknowledged in an interview that the economy is slowing but said it was 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 phase.
“I don’t think the US is in a recession right now,” Powell said. He found that many areas of the economy are doing “too well”. Powell specifically mentioned the job market, saying job growth is slowing but that’s to be expected. “It’s a very strong job market.”
The Commerce Department is also due on Friday to release its latest report on the June Personal Expenditures Index, the preferred indicator of inflation used by the Federal Reserve.
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Sarah Ewall-Wice