The Federal Reserve raised its benchmark interest rate by 0.75 percentage points on Wednesday.
The July meeting of the Federal Open Market Committee resulted in a triple-sized rate hike. The benchmark rate is now between 2% and 2.5%, roughly in line with what officials think is a neutral level for rates that are neither stimulative nor restrictive. The 0.75-point hike is only the second such increase since 1994 and reflects the Fed's still aggressive stance towards deflating high inflation.
"The Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2 1/2 percent and anticipates that continuing increases in the target range will be appropriate," the Fed said in a statement.
The increase was supported by all 12 members of the committee.
Government data shows price growth is increasing again. The Consumer Price Index went up 9.1% in the year through June, the fastest pace in 33 years. The print made it clear how difficult it is to tame inflation. Higher rates aim to cool inflation by slowing the economy. The effects of the June increase will not be felt until the end of the summer.
Financial markets were reassured by the report that the Fed wouldn't let up. After wavering between a 0.75 point and 1.0 point increase, investors priced in a triple-sized rate hike in July. Most bets on a full-point hike have been wiped out by recent commentary from Fed officials.
"The Federal Reserve's 75 basis-point increase now means that, in the space of just four months, they have hiked rates by as much as they did over the entire 2015-18 hiking cycle," said Seema Shah, chief global strategist at Principal Global Investors. The hiking cycle is proving to be one of the most aggressive in recent decades.
Concerns are likely to be raised more in the weeks to come. The Commerce Department is expected to publish its initial reading of second-quarter economic growth on Thursday. The economy is expected to shrink for a second quarter in a row, but economists expect output to grow. Many regard the back-to-back quarters of negative GDP as a sign of a downturn, so a negative print would increase concerns of a recession.
The Fed would be constrained further by a disappointing GDP number. Many argue that the Fed will stifle demand too quickly and that the recovery will be hampered by it. Powell has pushed back against the idea that a recession is inevitable, but has acknowledged that raising borrowing costs could hurt households.
The Fed won't have to act as aggressively in the future. The national average gas price has fallen from a record high seen in June, signaling that the energy inflation that has plagued households throughout the year is easing up. The prices for other commodities are going down.
As the Fed moves forward with its war on inflation, the slumps offer some hope that the central bank can avoid a self imposed recession.
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