Fed raises interest rate by 75 basis points in historic move to fight inflation

The Federal Reserve on Wednesday raised its policy rate by 75 basis points for the first time in nearly three decades as policymakers step up their fight to cool smoldering inflation, a move that threatens to slow growth. economy and exacerbate the financial pressure on Americans. .

The 75 basis point increase, the first since 1994, underscores how seriously Fed officials are taking the inflation crisis after a series of alarming economic reports.

The move puts the main federal funds benchmark rate in a range between 1.50% and 1.75%, the highest since the pandemic began two years ago.

The authorities also set an aggressive path of rate hikes for the remainder of the year. New economic forecasts released after the two-day meeting showed policymakers expect interest rates to reach 3.4% by the end of 2022, which would be the highest level since 2008.

WATCH LIVE: FED PRESIDENT JEROME POWELL TALKS ABOUT MASSIVE RATE RAISES AND INFLATION CRISIS

Jerome Powell, Chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee meeting in Washington, D.C., May 4, 2022. (Al Drago/Bloomberg via Getty Images / Getty Images)

By comparison, the March estimate showed that officials had calculated rates to hit 2.5% by the end of the year.

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

Shares rose after the statement, which was approved by all FOMC members except Kansas City President Esther George, who wanted a smaller half-point increase.

Until a few days ago, economists had widely expected the central bank to continue with a 50 basis point interest rate hike – twice the typical size – at its June meeting. Policymakers approved a 50 basis point increase in May and laid out a roadmap for similar-sized increases at their upcoming meetings, assuming the data evolved as expected.

But one bleak report from the Department of Labor Last week showed the consumer price index rose 8.6% in May from a year earlier, the fastest pace of increase since December 1981, dashing economists’ hopes that rising inflation was starting to slow. . And a different survey released on Monday showed that households are bracing for noticeably faster price increases, a worrying sign because Fed officials believe those expectations could be self-fulfilling.

Explaining the Fed’s decision during a post-meeting press conference, Chairman Jerome Powell said policymakers were looking for evidence that monthly inflation was flattening or starting to decline. With consumer prices repeatedly surprising and inflation expectations unexpectedly rising, policymakers determined that “strong action was needed,” he said.

Powell signaled that a half-point or three-quarter-point increase is more likely in July, although he reiterated that officials will make their decisions on a one-to-one basis.

Fed Chairman Jerome Powell witnesses

Federal Reserve Board Chairman Jerome Powell testifies about the economic outlook on Capitol Hill in Washington on November 13, 2019. (AP Photo/Jose Luis Magana/AP Newsroom)

“We anticipate that continued rate increases will be appropriate,” Powell said. “The pace of these changes will continue to depend on incoming data and the evolving outlook for the economy. Clearly, today’s 75 basis point increase is unusually large, and I don’t expect moves of this size to be common. … However, We will make our decisions meeting by meeting and continue to communicate our thinking as clearly as possible.”

RAISING FED RATES WILL HAVE ‘DEVASTATIVE’ IMPACT ON CONSUMERS, FORMER HOME DEPOT CEO ALERT

The question now is whether the Fed can successfully engineer the elusive soft landing – the sweet spot between containing demand to cool inflation without sending the economy into a downturn. Rising interest rates tend to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut spending.

Economic projections, known as the “dot plot”, show that while policymakers expect rate hikes to end in 2023 at a peak of 3.8%, they also forecast several modest interest rate cuts in 2024, a sign that the Fed may be bracing for a slowdown in the coming years.

Food price inflation

A man shops at a Safeway grocery store in Annapolis, Maryland on May 16, 2022 as Americans brace for the summer sticker shock and inflation continues to rise. (Jim Watson/AFP via Getty Images/Getty Images)

While officials have painted a predominantly upbeat picture of the economy so far, citing “robust” job gains and low unemployment, projections show that policymakers have lowered their outlook for gross domestic product in 2022 to 1.7%, compared to 2.8% in March. Officials also expect unemployment to rise slightly to 3.7% this year and 4.1% by 2024 as borrowing costs rise and economic demand dampens.

“We would like to see demand moderate. Demand is still very hot in the economy. We would like to see the labor market improve in the balance between supply and demand,” said Powell. He noted that officials will not “declare victory” until there is convincing evidence that inflation is falling.

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But the Fed chief dismissed the notion that central banks are trying to induce a recession, arguing that “there is no sign” of a broader slowdown. He sought to reassure Americans that higher rates will not trigger a recession and that a tightening policy is needed to tame prices, which weigh on families across the country.

“It appears that the US economy is in a strong position and well positioned to deal with higher interest rates,” he said.

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