The US Federal Reserve raised the benchmark interest rate again by three-quarters of a percentage point on Wednesday in its ongoing fight against the raging price pressures that are pressuring American families.
It was the second straight hike of 75 basis points and the fourth hike this year as US central bankers act aggressively to dampen the sharpest surge in inflation in more than four decades without derailing the world’s largest economy.
As the Fed saw signs the US economy was slowing, it signaled plans to further raise the cost of borrowing – and Fed Chair Jerome Powell made it clear that an even bigger rate hike is possible.
“Inflation is way too high,” Powell told reporters, saying the Fed will keep raising rates until there’s solid evidence inflation is getting closer to the 2 percent target.
Another “unusually large hike may be appropriate” at the next September meeting, Powell said, stressing that US central bankers “would not hesitate to take a bigger step than today” if warranted.
President Joe Biden is facing political backlash over rising prices, which he attributes mainly to the Russian invasion of Ukraine, which has pushed up global food and energy prices.
In a unanimous vote — in contrast to the decision taken in June — the Fed’s policy-making Federal Open Market Committee (FOMC) raised its policy rate to a 2.25-2.5 percent range after starting the year near zero .
Economists say this was the Fed’s most aggressive tightening cycle since the 1980s, when stagflation — a wage-price spiral and stagnant growth — crippled the US economy. But the Fed chair acknowledged that policymakers will eventually be able to slow the pace of rate hikes.
Wall Street seemed cheered by Powell’s comments, with solid gains for all three major stock indices, including the blue-chip Dow, which ended up more than 430 points.
The challenge for policymakers is to quell inflation before it takes root dangerously – and without plunging the world’s largest economy into a recession that would resonate around the world.
Powell has made it clear that they are willing to risk a downturn.
But on Wednesday he expressed confidence that the United States can avoid that fate and that the Fed can achieve a “soft landing” and tame inflation without triggering a recession.
“We’re trying to do the right thing. We’re not trying to have a recession, and we don’t think we have to,” Powell said.
– risk of recession –
The Fed chair nonetheless acknowledged that the path to threading that needle has “narrowed down”.
As government data for second quarter GDP is released on Thursday, the focus is intense on whether another negative read will mean the economy is in recession.
The economy contracted 1.6 percent from January to March, and although the consensus forecast calls for modest growth over the past three months, many economists are expecting a slowdown.
Two consecutive quarters of negative growth are widely taken as a sign that the economy is in recession, although this is not the official criterion.
But Powell said he doesn’t think the country is in a recession right now because “there are too many areas of the economy that are doing too well.”
While “there is a need to slow growth… We believe there is a way to bring inflation down while maintaining a strong labor market.”
US prices have continued to rise, and he lamented the hardships faced by families whose grocery store paychecks don’t stretch that far.
But the pace appears to be slowing, and gas prices at the pump have fallen more than 70 cents from a record of just over $5 a gallon in mid-June.
Meanwhile, rising mortgage rates have slowed home sales for five straight months, and the FOMC statement noted that “recent indicators of spending and output have eased.”
Policymakers seemed to recognize that some factors are beyond their control.
“Russia’s war against Ukraine is causing enormous human and economic hardship. The war and related events are creating additional upward pressure on inflation and weighing on global economic activity,” the FOMC statement said.
Oxford Economics’ Nancy Vanden Houten still expects another three-quarter-point rate hike at the next policy meeting, but after that, she says, “we’re waiting for the Fed to switch to a slower pace of 25bp hikes.”
Other economists are now calling for a smaller half-point hike.
The Fed will have two more important monthly data releases on employment and consumer prices before then.
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