The Federal Reserve announced another steep interest rate hike Wednesday, ramping up its efforts to bring inflation down from four-decade highs.
The Federal Open Market Committee (FOMC), the panel of Fed officials responsible for monetary policy, said Wednesday it would boost the central bank’s baseline interest rate by 0.75 percentage points to a range of 2.25 to 2.5 percent.
The Fed has now hiked interest rates by 75 basis points twice over the past two months, a remarkably fast increase that is likely to slow the economy. All 12 voting members of the FOMC supported the rate hike.
Fed officials hinted at another 75 basis point rate hike for weeks since the June FOMC meeting. The bank raised rates last month by 0.75 percentage points for the first time since 1994 after inflation surged higher in May than economists expected.
“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook,” said Fed Chairman Jerome Powell at a press conference following the announcement.
He said that while “another unusually large increase” may be in store, the Fed will not give further hints about how far rates will climb.
While the Fed’s rapid rate hikes have throttled the housing market, suppressed stock values and spurred a small rise in layoffs, they’ve yet to make a noticeable impact on inflation.
Consumer prices rose 9.1 percent annually in June and 1.2 percent last month alone, according to Labor Department data released this month. Though war-related supply shocks beyond the Fed’s control drove much of the June inflation surge, prices across the economy grew at much faster rates despite the central bank’s actions.
Powell and other top officials have insisted the bank will do whatever it takes to bring inflation back down toward its 2 percent annual target, even if it means higher unemployment and a potential recession in the short term.
He also acknowledged the Fed has little ability to bring down food and energy prices, but would continue to hike rates if inflation didn’t turn around.
Powell and many economists argue that allowing inflation to spiral out of control would cause a deeper economic downturn than one caused by higher interest rates. Without aggressive steps to fight inflation, they warn, price increases will eventually cause unemployment to spike but give the Fed and Congress little room to support the economy with stimulus.
“Price stability is really the bedrock of the economy, and nothing works in the economy without price stability. We can’t have a strong labor market without price stability for an extended period of time,” Powell said.
“We all want to get back to the kind of labor market we had before the pandemic,” he continued. “That’s not going to happen without restoring price stability.”
Though the economy on the whole has remained sturdy, the pain is already growing for many households with little room to handle higher prices.
Surging food, gasoline and shelter costs have pushed many struggling households toward food banks and difficult cutbacks.
Higher interest rates are boosting borrowing costs on credit cards, some automobile loans and other loans without fixed-interest rates, squeezing families on both sides of the balance sheet.
U.S. gross domestic product also fell during the first quarter of 2022 and economists say it’s likely GDP declined again in the second, meeting what had long been a rule-of-thumb definition for a recession.
While economists say the strong job market is a reassuring sign for the U.S. economy, some believe the Fed has already pushed the U.S. to the precipice of a recession and should slow down its fight against inflation.
“From here, it is possible that the Fed slows its tightening pace, reassured by the likely peaking of inflation and pullback in inflation expectations as oil prices have fallen,” Seema Shah, chief global strategist at Principal Global Investors, wrote in a Wednesday analysis.
“However, with the labor market still a picture of strength, wage growth still uncomfortably high and core inflation set to decline at a glacially slow pace, the Fed certainly cannot stop tightening, nor can it downshift gears too much.”
Powell said the current strength of the job market made it unlikely for the U.S. to be in recession right now, even with mounting signs of a slowing economy. While he acknowledged recession risks have risen, Powell says it’s still possible for the Fed to steer the U.S. out of high inflation without a steep downturn.
“There are just too many areas in the economy that are performing too well,” Powell said.
“2.7 million people hired in the first half of the year? It doesn’t make sense that the economy would be in recession with this kind of thing happening,” he continued.
Updated at 3:56 p.m.