The Federal Reserve took an aggressive step Wednesday to combat skyrocketing inflation with the announcement of another larger-than-usual three-quarters of a percentage point interest rate hike. The rise comes as central bank officials grapple with a difficult balancing act: curbing price rises amid growing concerns about an economic downturn.
The latest increase brings the fed funds rate to between 2.25% and 2.50%, which is where it was at its most recent high in the summer of 2019 before the coronavirus pandemic.
This marks the fourth interest rate hike of the year, as consumer prices have risen at the fastest rate in more than 40 years. Five months ago, the fed funds rate was close to zero percent. At its June meeting, the Federal Open Market Committee raised the fed funds rate a more aggressive 75 basis points for the first time in nearly 30 years, following a 25 basis point and 50 basis point hike at meetings in March and May, respectively.
With consumer prices up more than 9% from a year earlier, additional rate increases are expected through the end of the year. At their meeting last monthFed officials projected that the 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 anticipates additional rate hikes. Federal Reserve Chairman Jerome Powell said on Wednesday that another “unusually large” rate hike at the next meeting might be “appropriate,” but the committee is making that decision on a meeting-by-meeting basis, and the hikes are likely then they slow down Powell acknowledged the possibility of more raises next year.
Increases in the fed funds rate have led to higher borrowing costs for Americans. According to Greg McBride, chief financial analyst at Bankrate.com, debt with variable rates, such as credit cards and home equity lines of credit, will be hit the hardest.
“Consumers should look for low-rate credit card balance transfer deals and do so urgently to protect themselves from further rate increases and move forward on debt repayment,” McBride said. “Ask your lender if locking the interest rate on the outstanding balance of your home equity is an option.”
The increase in the fed funds rate comes as several other key economic data are scheduled to be released this week. On Thursday, the Commerce Department will release its report on GDP for the second quarter of 2022, which could show more signs that the US is in a recession after the measure of economic activity declined in the first quarter of the year. .
On Monday, President Biden said during an event that the United States will not enter a recession, noting that the unemployment rate is close to its pre-pandemic level at 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 but said it is not an economy in recession. The National Bureau of Economic Research determines if the United States is in a recession. Yellen argues that the economy is in a period of transition.
“I don’t think the United States is currently in a recession,” Powell said. He pointed out that there are many areas of the economy that are doing “too well.” Powell specifically mentioned the labor market, saying job growth is slowing, but that is expected. “This is a very strong job market.”
The Commerce Department will also release its latest report on the personal consumption expenditures price index for June on Friday, the preferred gauge of inflation used by the Federal Reserve.
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