The Fed raises interest rates by 0.75 basis points for the second month in a row

The Federal Reserve raised its benchmark interest rate by 0.75 percentage points for a second straight month on Wednesday as it doubled down on its aggressive approach to curbing rising inflation despite early signs that the US economy is beginning to lose steam.

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

The decision, which had unanimous support, extended a string of rate hikes that began in March and have increased in size as the Fed̵[ads1]7;s fight to fight inflation intensifies.

The rate hike means the central bank is in its most aggressive cycle of monetary tightening since 1981. It follows a half-point increase in May, and a 0.75 percentage point increase last month – the first of that 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 hikes is hotly debated.

Economists are divided on whether the Fed will implement another interest rate increase of 0.75 percentage points at its next meeting in September or opt for a smaller increase of half a point.

In a news conference after the decision, Fed Chair Jay Powell said that as the central bank continues to tighten policy, “it will likely be appropriate to slow the hike” while policymakers consider how rate hikes affect the economy and inflation.

Those comments led to a market rally, with the blue-chip S&P 500 index rising 2.6 percent and the tech-heavy Nasdaq up 4.1 percent. The two-year government interest rate, which moves with interest rate expectations, was 0.08 percentage points lower at 2.97 percent.

Ashish Shah, chief investment officer at Goldman Sachs Asset Management, said: “We are past peak hawkishness. . . 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 hike may be appropriate” at the September meeting. He added that the committee “would not hesitate” to implement an increasingly sharp increase if 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 may be needed to bring down high inflation, but he rejected the suggestion that the US is already in recession.

“The US is not currently in a recession and the reason is that there are just too many areas of the economy that are performing too well,” he said, although he added that avoiding one has become more challenging.

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

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

The federal funds rate is projected to reach around 3.5 percent this year, a level that will more actively limit economic activity.

Central bank policymakers want to see a series of easing monthly inflation readings, but economists warn that may not happen for several months, at least for “core” readings that strip out volatile items such as food and energy.

In June, core goods and services registered an alarming jump of 0.7 percent, led by a sharp increase in rent and other housing-related costs and other expenses that are likely to remain high through the fall.

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