WASHINGTON ( Associated Press) – The Federal Reserve on Wednesday raised its benchmark interest rate by three-quarters for the second consecutive time in its most aggressive campaign in three decades to tame high inflation.
Watch the meeting in the player above.
The move by the Fed would raise its key rate, which affects many consumer and business loans, from 2.25 percent to 2.5 percent, its highest level since 2018.
The central bank’s decision follows a 9.1 percent jump in inflation, the fastest annual rate in 41 years, and reflects its strenuous efforts to slow price gains in the economy. By raising lending rates, the Fed makes it expensive to take out mortgages or auto or business loans. Consumers and businesses then possibly borrow and spend less, cooling the economy and slowing inflation.
The Fed is tightening credit while the economy begins to slow, increasing the risk that its rate hikes will trigger a recession this year or next. Rising inflation and fear of recession have eroded consumer confidence and raised public concern about the economy, sending disappointingly mixed signals.
As the November midterm election draws to a close, discontent among Americans has lowered President Joe Biden’s public approval ratings and raised the possibility that Democrats will lose control of the House and Senate.
Explainer: How the latest Federal Reserve rate hike affects your finances
The Fed’s rapid credit tightening moves have torpedoed the housing market, which is particularly sensitive to interest rate changes. The average rate on a 30-year term mortgage has nearly doubled in the past year to 5.5 percent, and home sales have fallen.
At the same time, consumers are indicating to cut spending amid higher prices. And business surveys show that sales are slowing.
The central bank is betting that it can slow growth to contain inflation but not so much as to trigger a recession – a risk that many analysts fear could end badly.
In a statement issued after the Fed ended its latest policy meeting, it acknowledged that “indicators of spending and production have softened,” “job gains have been strong in recent months, and the unemployment rate remains low.” ” The Fed generally attaches high importance to the pace of hiring and wage increases because when more people earn a paycheck, the resulting spending can fuel inflation.
Ian Shepherdson of Pantheon Macroeconomics noted that point, saying, “The Fed is not ready — yet — to accept that weak growth is a reason to slow the pace of tightening,”
On Thursday, when the government forecast GDP for the April-June period, some economists think it may show the economy has contracted for the second quarter in a row. This will complete a long-held belief that the recession will begin.
But economists say that will not mean a recession has begun. During the same six months when the overall economy would have shrunk, employers added 2.7 million jobs – more than in most years before the pandemic. Wages are also rising at a healthy pace, with many employers still struggling to attract and retain enough workers.
Still, slow growth puts the Fed’s policymakers in a high-risk crisis: How high should they raise lending rates if the economy is in decline? Weak growth, if it causes layoffs and increases unemployment, often leads to inflation on its own.
This dilemma could become even more consequential for the Fed next year, when the economy may be in worse shape and inflation will likely still exceed the central bank’s 2 percent target.
watch: Inflation rises more than expected due to rising cost
“How much recession are you willing to risk to get (inflation) back to 2 percent, quickly, versus over the course of several years?” asked Nathan Sheets, a former Fed economist who is the global chief economist at Citi. “They’re going to wrestle with issues like this.”
Bank of America economists are forecasting a “mild” recession later this year. Analysts at Goldman Sachs predict a 50-50 chance of a recession within two years.
Most analysts anticipating a slowdown expect it to be relatively mild. The unemployment rate, they note, is near a 50-year low, and families are in solid financial shape with more cash and smaller debt than they were after the housing bubble burst in 2008.
Fed officials have suggested that at their new level, their key short-term rate would neither stimulate nor restrict growth – what they call a “neutral” level. Chairman Jerome Powell has said the Fed wants its key rate to become neutral relatively soon.
Should signs of a slowdown in the economy continue, the Fed could reduce the size of its rate hike, perhaps by half a point, as early as its next meeting in September. Such an increase, followed by perhaps quarter-point increases in November and December, would still push the Fed’s short-term rate hike from 3.25 percent to 3.5 percent by the end of the year — the highest point since 2008.