The Federal Reserve makes another large rate hike to control inflation

WASHINGTON — The Federal Reserve on Wednesday continued its campaign of rapid interest rate hikes, raising borrowing costs at the fastest pace in decades in an effort to rein in inflation.

Fed officials voted unanimously at their July meeting for the second consecutive large rate hike, a three-quarter point move, and signaled another big tightening could happen at their next meeting in September, though that is yet to come. to decide. Wednesday’s decision puts the Fed’s policy rate in a range of 2.25 to 2.5 percent.

The central bank’s crackdown is aimed at slowing the economy by making it more expensive to borrow money to buy a home or expand a business, weighing on the housing market and economic activity in general. Fed Chairman Jerome H. Powell said during a post-meeting news conference that such cooling was needed to allow supply to catch up with demand so that inflation could moderate.

Powell acknowledged that the Fed’s policy changes are likely to cause some economic damage, in particular by weakening the labor market. That has made the central bank’s rate hikes unwelcome among some Democrats, who argue that crushing the economy is a crude way to reduce the current rate of inflation. But the Fed chairman stressed that today’s economic sacrifice was necessary to put the United States back on a long-term sustainable path with slow and predictable price increases.

“We need growth to slow down,” Powell said. “We don’t want this to be any bigger than it needs to be, but ultimately, if you think about the medium and long term, price stability is what makes the whole economy work.”

Stocks rose after the Fed decision and Powell’s press conference. Some rate strategists asked why, because Powell’s comments aligned with the message Fed officials have consistently sent: Inflation is too high, the central bank is determined to squash it, and interest rates are likely to rise. even more this year.

“There is a lot of information between now and the September meeting, and I think the markets will reevaluate,” said Priya Misra, director of global rates strategy at TD Securities. “This is an even more data-dependent Federal Reserve, and it will slow down to if inflation gives them the room to slow down.”

The Fed started raising interest rates from near zero in March, and policymakers have picked up the pace considerably since then in reaction to incoming economic data, as price increases have continued to accelerate at an alarming rate.

After making a quarter-point move to start, the central bank raised rates by a half-point in May and by three-quarters of a point in June, which was the largest single step since 1994. Officials could continue to hike rates rapidly in September. . or they could slow down, depending on how the economy performs.

“We could do another unusually large rate hike,” Powell said Wednesday. “But that’s not a decision we’ve made at all.”

Powell said the likely interest rate path the Fed outlined earlier this year, in which rates rise to around 3.5 percent this year, remains reasonable. The Fed is likely to raise borrowing costs to “at least a moderately restrictive level,” at which they are more actively dragging down the economy, he said.

But the mere acknowledgment that growth is cracking and rate hikes will eventually taper off was enough to appease investors. The S&P 500 stock index ended the day 2.6 percent higher, with the Nasdaq Composite posting its best day since April 2020. However, markets can quickly change tune. The last two times the Fed raised rates, the S&P 500 rose on the day of the announcement, only to fall the following day.

“At some point it will be appropriate to slow down,” Powell said. “We will be guided by the data.”

For now, the data, at least when it comes to inflation, remains worrying.

Consumer prices rose by 9.1 percent in the year through June, with costs rising rapidly on a variety of goods and services, from food and fuel to rent and dry cleaning.

The Fed will receive a new reading of his preferred measure of inflation, the personal consumption expenditures index, on Friday. That report is likely to confirm the signal sent by the most timely Consumer Price Index: inflation was extremely fast in June, rising at the fastest pace in decades.

Inflation will probably slow down a bit in July, because gas prices have come down noticeably this month. Still, officials will be watching in the coming months for signs of a broad and sustained slowdown in prices.

The Fed is the nation’s top responder when it comes to inflation, but the White House is also trying to help where it can.

The central bank’s latest hike came a day when Democrats appeared to reach a deal in the Senate on a bill aimed at lowering the price of prescription drugs and low-emission electricity, while lowering the federal deficit, something President Biden called “a bill to fight inflation and reduce costs for American families.”

Still, central bankers are nervous that after more than a year of rapid cost swings, Americans might start to expect inflation to last if it isn’t brought down quickly.

If people and businesses begin to adjust their behavior in anticipation of rising prices (workers demand higher wages and businesses pass on their rising costs and expenses to customers), inflation could become a more permanent feature of the economy. .

When inflation took hold in the 1980s, the Federal Reserve, trying to beat it, eventually raised interest rates to double-digit levels and caused back-to-back recessions that pushed up the unemployment rate. above 10 percent. The 2022 Fed does not want a repeat.

“Doing too little and leaving the economy with this entrenched inflation only drives up the costs,” Powell said Wednesday.

The United States is not alone in waging a campaign against rapid price increases. inflation has accelerated around the world as the pandemic has disrupted supply chains and Russia’s war in Ukraine disrupts fuel and food markets. Many central banks are raising interest rates to slow their own economies, hoping to bring prices back under control.

In the United States, growth has already shown signs of weakening as the Fed’s measures begin to take effect and inflation itself weighs on household pockets. The housing market is cooling fast as high mortgage rates drive away potential buyers and deter builders from starting new houses. Some measures of consumer spending also suggest a slowdown: Walmart said this week that inflation was pressuring consumers to buy fewer goods. consumer sentiment has been sinking and many economists have begun to predict at least a mild recession.

Mr. Powell made it clear that while he sees some signs of cooling, he does not think the US is in a recession yet.

“I don’t think the US economy is likely to be in a recession right now,” Powell said.

That’s in part because the job market remains strong, with unemployment at 3.6 percent, near the lowest level in 50 years. New data to be released on Friday is expected to show workers’ compensation rising rapidly, though not fast enough to keep up with today’s rapid inflation.

The Fed hoped that because the labor market is starting from such a strong place, it will be able to slow the economy enough to begin to reduce inflation without hurting it enough to trigger a wave of job losses. But central bankers have also stressed that achieving such an outcome could be difficult.

“Our goal is to reduce inflation and have a soft landing,” Powell said. “We are trying to achieve that. I have said on many occasions that we understand that it is going to be a big challenge and that it has become more challenging in recent months.

The Fed chairman repeatedly returned to the idea that while the central bank’s response could be painful, rapid price increases are also punishing.

Low-income people “are hurting,” he said, when they go to the grocery store and find out their paycheck doesn’t cover the food they usually buy. “It is very unfortunate and that is why we are really committed to reducing inflation.”

Joe Rennison and Jim Tankersley contributed to this report.