The Fed raises interest rates by 0.75 percentage points to tackle inflation

The Federal Reserve raised interest rates by three-quarters of a percentage point on Wednesday, its biggest move since 1994, as the central bank steps up efforts to tackle the fastest inflation in four decades.

The big rate hike, which markets were expecting, has underscored that Fed officials are serious about crushing price increases, even if it comes at a cost to the economy.

In a sign of how the Fed expects its policies to affect the economy, officials predicted the unemployment rate would rise to 3.7 percent this year and 4.1 percent by 2024, with growth slowing markedly as for policymakers to dramatically increase borrowing costs and choke off economic demand.

The Fed’s policy rate is now set in a range between 1.50 and 1.75 and policymakers have suggested more rate hikes in the future. The Federal Reserve, in a new set of economic projections, noted interest rates hit 3.4 percent by the end of 2022. That would be the highest level since 2008 and officials saw its policy rate hit a high of 3.8 percent at the end of 2023. Those numbers are significantly higher than previous estimates, which showed rates peaking at 2.8 percent next year.

Fed officials have also recently indicated that they expect to cut rates in 2024, which could be a sign that they believe the economy will weaken so much that they will need to refocus their policy approach. The main takeaway from the Fed’s economic forecasts, which it released for the first time since March, was that officials have grown more pessimistic about their chances of letting the economy down gently.

Underscoring that, policymakers deleted a sentence from their post-meeting statement that had predicted inflation could moderate as long as the labor market remains strong, a sign they think they may have to rein in job growth. to control inflation.

“Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, higher energy prices and broader pricing pressures,” the Fed reiterated in its post-meeting statement.

One official, Federal Reserve Bank of Kansas City President Esther George, voted against the rate increase. Although Mrs. George has historically been concerned about high inflation and favored higher interest rates, she would have preferred a half-point move in this case.

As of late last week, markets and economists were generally expecting a half-point move. The Fed had raised rates by a quarter point in March and by a half point in May, and had signaled that it expected to continue raising rates at that rate in June and July.

But central bankers have received a series of bad news on inflation in recent days. The Consumer Price Index rebounded 8.6 percent in May from a year earlier, the fastest rate of increase since late 1981, as the monthly rate of inflation remained strong even after excluding consumer prices. food and fuel.

While the Fed’s preferred gauge of inflation, the measure of personal consumption expenditures, is slightly lower, it also remains too high for comfort. And consumers are beginning to expect faster inflation in the coming months and even years, according to the survey data, which is a worrying development. Economists believe that expectations can be self-fulfilling, causing people to ask for wage increases and accept price increases that perpetuate high inflation.

It is increasingly unlikely that the Fed will be able to quickly and smoothly cool inflation to the 2 percent annual rate it is aiming for on average and over time.

The central bank has been trying to put the economy on a more sustainable path without pushing it into a crushing recession that will cost jobs and stunt growth. Policymakers hoped to raise borrowing costs to reduce demand enough to balance supply and demand without inflicting further pain. But as price increases prove stubborn, achieving the so-called soft landing becomes more of a challenge.

The central bank’s interest rate hikes are already filtering through to the wider economy, driving up mortgage rates and helping the housing market start to cool. Demand for other consumer goods is showing signs of starting to slow as money becomes more expensive to borrow and businesses may cut back on expansion plans.

The goal is to weigh enough on demand to allow supply, which remains tight amid global factory closures, shipping problems and labor shortages, to catch up.

But reining in demand without sinking growth is difficult, especially since consumption makes up the bulk of the US economy. If the Fed has to slash spending to rein in price increases, it could lead to job losses and business closures.

Markets are increasingly fearful that central bank policy will cause a recession. Stock prices have slumped and bond market signals are flashing red as Wall Street traders and economists increasingly expect the economy could fall, perhaps as soon as next year.

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