The Fed unleashes another big rate hike in an effort to rein in inflation :: WRAL.com

The Federal Reserve on Wednesday raised its benchmark interest rate by three-quarters of a point for the second time in a row in its strongest campaign in more than three decades to tame high inflation.

The Fed’s move will raise the key interest rate, which affects many consumer and business loans, to a range of 2.25% to 2.5%, the highest level since 2018.

Speaking at a news conference after the Federal Reserve’s latest policy meeting, Chairman Jerome Powell provided mixed signals about the central bank’s possible next moves. He stressed that the Fed remains committed to defeating chronically high inflation, while ruling out the possibility that it will soon turn to lower interest rate increases.

Even as fears grow that the Fed’s efforts may eventually lead to a recession, Powell has plenty of opportunities to say the central bank will slow its gains if a recession occurs while inflation is still high.

Roberto Burley, an economist at Piper Sandler, an investment bank, said the Fed chief emphasized that “even if it causes a recession, lowering inflation is important.”

But Powell’s suggestion that rate hikes could slow now that his key rate is nearly at a level thought to neither support nor restrain growth helped spark a strong rally on Wall Street, with the S&P 500 stock market index up 2.6%. The prospect of lower interest rates in general is fueling stock market gains.

Meanwhile, Powell was careful during his press conference not to rule out another three-quarter point increase when Fed policymakers meet next September. He said that the interest rate decision will depend on what will emerge from the many economic reports that will be issued from time to time.

“I don’t think the US is currently in a recession,” Powell said at his press conference, noting that the Fed’s rate hikes have already had some success in slowing the economy and possibly easing inflationary pressures.

The central bank’s decision follows a jump in inflation to 9.1%, the fastest annual rate in 41 years, and reflects its strenuous efforts to slow price gains across the economy. By raising borrowing rates, the Federal Reserve makes it more expensive to obtain a mortgage, car or business loan. Consumers and businesses are then supposed to borrow and spend less, cooling the economy and slowing inflation.

Rising inflation and fear of a recession have eroded consumer confidence and raised public concern about the economy, which is sending frustratingly mixed signals. With the midterm elections looming in November, Americans’ discontent has slashed President Joe Biden’s public approval ratings and raised the possibility that Democrats could lose control of the House and Senate.

The Fed’s moves to tighten credit sharply have torpedoed the housing market, which is particularly sensitive to interest rate changes. The average 30-year fixed mortgage rate nearly doubled last year, to 5.5%, and home sales have fallen.

Consumers are showing signs of spending cuts in the face of higher prices. Business surveys suggest sales are slowing. The central bank is betting it can slow growth just enough to tame inflation but not so much as to trigger a recession – a risk many analysts fear may end badly.

In his press conference, Powell suggested that with the economy slowing, demand for workers falling modestly, and wage growth likely to peak, the economy is developing in a way that will help reduce inflation.

“Are we seeing a slowdown in economic activity that we think we need?” Asked. “There is some evidence that we are.”

The Fed chair also cited measures that investors expect inflation to fall back to the central bank’s 2% target over time as a sign of confidence in its policies.

Powell also backed Fed officials’ predictions last month that their record rate would reach a range of 3.25% to 3.5% by the end of the year and about half a percentage point more in 2023. That prediction, if held, would mean a slowdown in the Fed’s rises. The central bank will reach its target at the end of the year if it raises the key rate by half a point when it meets in September and by a quarter point at each of its November and December meetings.

“I think they’re going to tip their toes from here,” said Thomas Garritson, chief portfolio strategist at RBC Wealth Management, with the Fed now enforcing two consecutive rate hikes.

On Thursday, when the government estimates gross domestic product for the April-June period, some economists think it may show that the economy contracted for the second consecutive quarter. This would satisfy a long-standing assumption about when the recession would start.

But economists say this does not necessarily mean a recession has begun. During those same six months when the overall economy contracted, employers added 2.7 million jobs — more than most of the entire years before the pandemic. Wages are also rising at a healthy pace, and many employers are still struggling to attract and retain enough workers.

However, slowing growth puts Fed policymakers in a very dangerous bind: How far should they raise borrowing rates if the economy is slowing? Weaker growth, if it causes layoffs and higher unemployment, often reduces inflation on its own.

This dilemma may become more important for the Federal Reserve next year, when the economy may be in worse shape and inflation is likely to exceed the central bank’s 2% target.

“How much recession risk are you willing to take to bring (inflation) back to 2% quickly versus over several years?” asked Nathan Sheets, a former Federal Reserve economist and Citi’s chief global economist. “These are the kinds of issues they will have to deal with.”

Economists at Bank of America expect a “moderate” recession later this year. Goldman Sachs analysts estimate a 50-50 chance of a recession within two years.

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Associated Press economics writer Paul Wiseman contributed to this report.

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