At the conclusion of their July monetary policy-making meeting, members of the US central bank once again on Wednesday approved a sizeable interest rate hike of three quarters of a percentage point. Members voted unanimously in favor of the aggressive move to tackle red-hot inflation.
The unprecedented action underscores how far the Fed is willing to push the economy to moderate rising costs for Americans amid the highest price increases since the 1980s.
“Recent spending and output indicators have softened,” Fed officials said in an official statement. “However, job creation has been strong in recent months and the unemployment rate has remained low.” Inflation remains high, they said, “reflecting pandemic-related supply and demand imbalances, higher food and energy prices, and broader price pressures.”
In previous months, the central bank has noted higher energy prices, but this is the first month it includes rising food costs in its analysis.
When the pandemic first hit the United States, the Federal Reserve implemented a series of emergency measures to support the economy, including cutting its interest rate to zero, which made borrowing money almost free. But while that “easy money” policy encouraged household and business spending, it also fueled inflation and contributed to the overheating of today’s economy.
Now that the economy no longer needs the Fed’s support, the central bank has been taking steps to “eliminate the punch bowl” and slow the economy by raising interest rates.
The Fed’s actions will increase the rate banks charge each other for overnight loans to a range of 2.25% to 2.50%, the highest since December 2018.
Over the past three decades, the Fed has raised or lowered its benchmark interest rate by an average of 25 basis points, preferring to slow down the economy. But rising inflation forced the central bank last month to implement a rate hike of three times that size, marking the first time since 1994 that the Fed has implemented a 75 basis point increase. Wednesday’s rate hike marks the first time in the Fed’s modern history that the central bank has raised interest rates by 75 basis points twice in a row.
The question now is whether the Fed will be able to remove the coup without ending the party.
“Whether the economy can transition smoothly from allegro to adagio is very much in doubt and depends both on the current state of the economy and how the Fed conducts policy from here,” said David Kelly, chief global strategist. of JPMorgan Asset Management.
In the last 11 tightening cycles, the Fed has only successfully avoided recession three times. During each of those cycles, inflation was lower than it is today. That has made some analysts and market participants nervous.
“A soft landing feels like a long shot from here,” said Seema Shah, chief strategist at Principal Global Investors. “Fed policy cannot directly affect food or energy inflation, while rate hikes have so far done little to dampen core CPI [Consumer Price Index] components that are traditionally more sensitive to monetary policy”.
BlackRock analysts said in a note: “We believe a soft landing is unlikely. Central banks today face stark trade-offs between growth and inflation. We expect the Fed to change course only next year, when the effects economic effects of rate hikes become apparent. .”
Fed Chairman Powell will hold a news conference at 2:30 pm ET on Wednesday.
This is a developing story and will be updated.