The Federal Reserve raised its benchmark policy rate by 0.75 percentage point for the second straight month on Wednesday as it doubled down on its aggressive approach to reining in runaway inflation despite early signs that the US economy is beginning to run out of steam.
At the end of its two-day policy meeting, the Federal Open Market Committee raised the target range for the fed funds rate to 2.25 percent to 2.50 percent.
The decision, which drew unanimous support, extended a series of interest rate hikes that began in March and have grown in size as the Fed’s battle to combat inflation intensifies.
The rate hike means the central bank is in the midst of the most aggressive cycle of monetary tightening since 1981. It is followed by 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, more rate hikes are expected well into the second half of 2022, but the pace of those increases is hotly debated.
Economists are divided on whether the Fed will implement another 0.75 percentage point rate hike at its next meeting in September or opt for a smaller half-point increase.
In a press conference following the decision, Fed Chairman Jay Powell said that as the central bank continues to tighten policy “it will probably be appropriate to slow the rate of hikes” while policymakers assess how rate increases are affecting the economy and inflation.
Those comments sparked a market rally, with the blue-chip S&P 500 Index rising 2.6 percent and the tech-heavy Nasdaq gaining 4.1 percent. The two-year Treasury yield, which moves with interest rate expectations, was 0.08 percentage point lower at 2.97 percent.
Ashish Shah, chief investment officer at Goldman Sachs Asset Management, said: “We have passed the peak of the aggressive line. . . its speed in the future will be slower.”
However, Powell said the Fed would switch to a “meeting-by-meeting” approach to setting policy and that “another unusually large increase may be appropriate” at the September meeting. He added that the committee “would not hesitate” to implement an ever-increasing increase if the economic data warrants 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 suggestions that the United States is already in a recession.
“The United States is not currently in a recession, and the reason is that there are too many areas of the economy that are doing too well,” he said, though he added that avoiding one has become more difficult.
The central bank revised its assessment of the economy, saying “recent spending and output indicators have softened,” a more dovish outlook than last month when it said “economic activity appears[ed] have picked up.”
Powell reiterated that allowing inflation to “entrench” would be a worse outcome than moving too aggressively, adding: “Price stability is what makes the whole economy tick.”
The fed funds rate is projected to hit about 3.5 percent this year, a level that will more actively limit economic activity.
Central bank policymakers want to see a series of monthly inflation readings slow, but economists warn that might not happen for months, at least for “core” readings that strip out volatile items like food and energy.
In June, basic goods and services registered an alarming jump of 0.7%, led by a strong rebound in rent and other costs related to housing and other expenses that are likely to remain high until the fall.
The Fed raised rates just a day before the release of gross domestic product figures, which could show a second straight quarter of contracting economic growth. That would meet one of the common criteria for a technical recession, but Powell on Wednesday pointed to other signs of economic strength, including a strong job market, to challenge the notion.