Fed raises rates by 75
basis points to double down on inflation
That makes the cumulative increase since June the steepest rise since the early 1980s.
Federal Reserve officials raised interest rates by 75 basis points
for the second straight month, delivering the most aggressive tightening in
more than a generation to curb surging inflation -- but risking a sharp blow to
the economy.
Policy makers, facing the hottest price pressures in 40 years,
lifted the target range for the federal funds rate on Wednesday to 2.25% to
2.5%. That takes the cumulative June-July increase to 150 basis points -- the
steepest rise since the price-fighting era of Paul Volcker in the early 1980s.
The Federal Open Market Committee “is strongly committed to returning inflation to its 2% objective,” it said in a statement released in Washington, repeating previous language that it’s “highly attentive to inflation risks.” The FOMC reiterated it “anticipates that ongoing increases in the target range will be appropriate,” and that it would adjust policy if risks emerge that could impede attaining its goals.
Criticized for misjudging inflation and being slow to respond, officials are now forcefully raising interest rates to cool the economy, even if that risks tipping it into recession.
Higher rates are already having an impact on the US economy. The
effects are particularly evident in the housing market, where sales have
slowed.
While Fed officials maintain that they can manage a so-called
“soft landing” for the economy and avoid a steep downturn, a number of analysts
say it will take a recession with mounting unemployment to significantly slow
price gains.
The FOMC noted Wednesday that “recent indicators of spending and
production have softened,” but also pointed out that job gains “have been
robust in recent months, and the unemployment rate has remained low.”
The latest increase puts rates near Fed policy makers’ estimates
of neutral -- the level that neither speeds up nor slows down the economy.
Forecasts in mid-June showed officials expected to raise rates to about 3.4%
this year and 3.8% in 2023.
Investors are now watching to see if the Fed slows the pace of
rate increases at its next meeting in September, or if strong price gains
pressure the central bank to continue with super-sized hikes.
The US consumer price index rose by 9.1% in June from a year
earlier, topping forecasts and hitting a fresh four-decade high. The price
gains are eroding earnings and sowing discontent with the economy, creating
challenges for President Joe Biden and congressional Democrats ahead of the
midterm elections.
High inflation had briefly fueled speculation that the Fed would
lift rates by a full percentage point this month. But those bets got dialed
back after Fed officials voiced wariness and key readings on consumer
expectations for future inflation were better than expected.
