The Federal Reserve on Wednesday took an aggressive step to combat rising inflation with the announcement of another larger-than-usual three-quarter percentage point interest rate hike. The increase comes as central bank officials face a tough balancing act: bringing down rising prices amid growing concerns about an economic slowdown.
The latest increase brings the federal funds rate to between 2.25% and 2.50%, which is where it was at its most recent peak in the summer of 2019 before the coronavirus pandemic.
This marksof the year as consumer prices have risen at the fastest pace 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 by a more aggressive 75 basis points for the first time in nearly 30 years, following increases of 25 basis points and 50 basis points respectively at its March and May meetings.
With consumer prices up more than 9% from a year ago, further interest rate increases are expected throughout the year.Fed officials projected that the interest rate would rise to more than 3% by 2023. The committee will meet again in September, November and December.
The Federal Reserve signaled that it expects further rate hikes. Federal Reserve Chairman Jerome Powell said on Wednesday that another “unusually large”[ads1]; interest rate increase at the next meeting may be “appropriate”, but the committee takes that decision meeting by meeting, and it will probably then be reduced. Powell acknowledged the possibility of additional hikes next year.
Increases in the federal funds rate have led to higher borrowing costs for Americans. According to Greg McBride, financial analyst at Bankrate.com, debt with variable interest rates such as credit cards and mortgages will be affected the most.
“Consumers should look for low-interest balance transfer offers and do so urgently to insulate themselves from further rate hikes and make progress in paying down debt,” McBride said. “Ask the lender if there is an option to fix the interest rate on your outstanding equity balance.”
The federal funds rate hike comes as several other key economic data are scheduled to be released this week. On Thursday, the Commerce Department will publish its report on GDP for the second quarter of 2022, which may show further signs that the US is in a recession after measures of economic activity fell in the first quarter of the year.
On Monday, President Biden said at an event that the United States is not going to be in a recession, noting that the unemployment rate is close to its pre-pandemic level of 3.6%. Over the weekend, Treasury Secretary Janet Yellen, who also previously served as chair of the Federal Reserve, acknowledged in an interview that the economy is slowing down, but said it is not an economy in recession. Whether the United States is in a recession is determined by the National Bureau of Economic Research. Yellen claims that the economy is in a transition period.
“I don’t think the United States is currently in a recession,” Powell said. He noted that there are many areas of the economy that are performing “too well.” Powell specifically mentioned the labor market, saying that job growth is slowing, but that is expected. – This is a very strong labor market.
The Commerce Department will also release its latest report on the personal consumption expenditures price index for June on Friday, the preferred inflation gauge used by the Federal Reserve.