The Federal Reserve raised interest rates by 0.75 points for the second month in a row

The Federal Reserve raised its benchmark rate by 0.75 percentage points for the second month in a row on Wednesday as it doubled down on its aggressive approach to taming rising inflation despite early signs that the US economy was losing steam.

At the end of the two-day policy meeting, the Federal Open Market Committee raised the target range for the federal funds rate to 2.25 percent to 2.50 percent.

In a statement accompanying the announcement, the FOMC said it “expects that continued increases in the target range will be appropriate.”

The decision, which was unanimously supported, extended the series of interest rate increases that began in March, and has only grown in size as the Fed’s fight to fight inflation intensifies.

The rate hike means the Fed is in the midst of the most aggressive monetary tightening cycle since 1981. It follows a half-point rate hike in May, and a 0.75 percentage point rise last month – the first of that size since 1994.

The new target range is now near what most officials see as a “neutral rate” that does not stimulate or constrain growth if inflation is at the 2 per cent target.

With inflation rising at its fastest pace in more than four decades, further rate hikes are expected in the second half of 2022, but the pace of these increases is hotly debated. Economists are divided over whether the central bank will implement another rate increase of 0.75 percentage point at its next meeting in September or opt for a smaller rate increase of half a point.

Markets were slightly affected by the Fed’s decision at first, but stocks rose and the two-year Treasury yield fell after President Jay Powell’s comments at the subsequent press conference, where he indicated that investors should not see a third increase of 0.75 percent. Iron certainty.

The S&P 500 was 2.3 percent higher, while the Nasdaq Tech Index was up 3.7 percent. The two-year Treasury yield, which moves with interest rate expectations, was down 0.08 percentage point at 2.97 percent.

“This number was as expected,” said Ashish Shah, chief investment officer at Goldman Sachs Asset Management. Lots of drama is shown at this point. We have passed the peak of the hawks. . . Their speed in the future will be slower. “

Bets in the futures market where the Fed’s key rate at the end of the year will be down from 3.4 per cent before the announcement to 3.3 per cent. The bets in this market also indicate that investors believe that December will mark the peak of the Fed interest rate.

The Fed acknowledged there were early indications that the economy was starting to slow, but showed few signs of hesitation from its “unconditional commitment” to restore price stability.

In its statement, the central bank changed its assessment of the economy, noting that “recent indicators of spending and production have declined,” a more pessimistic view than last month when it said “economic activity appears to be slowing down.”[ed] to pick up.”

Senior officials have previously said that a failure to control inflation and allow it to become “entrenched” would be a worse outcome than moving too aggressively.

The federal funds rate is expected to be around 3.5 percent this year, a level that would constrain economic activity more actively. Most officials believe that policy must become “restricted” in order for wet demand to reach a level where price growth is constrained.

Officials previously indicated that there must be “clear and convincing” evidence that inflation has begun to slow before the Federal Reserve eases its efforts to tighten monetary policy.

Central bank policymakers want to see a series of slowing monthly readings of inflation, but economists warn that may not happen for several months, at least for “core” readings that exclude volatile items such as food and energy.

In June, basic goods and services posted a worrying 0.7 percent jump, led by a sharp rise in rent and other costs related to housing and other expenses likely to remain high in the fall.

The Fed raised interest rates just a day before the release of GDP figures, which could show the second consecutive quarter of contraction in economic growth. That would meet one of the common criteria of technical stagnation, but officials pointed to other signs of economic strength — including a strong labor market — to challenge that proposal.

Conflicting economic data points will make the Fed’s job more difficult as it plots subsequent policy actions while increasing pressure on the central bank to slow the pace of interest rate hikes soon.

Officials still hold the view that inflation can be brought down to the Fed’s 2 percent target without excessive job losses, although they acknowledged that the path to achieving that outcome has become narrower.

“Inflation remains the Fed’s number one priority and they are willing to sacrifice growth to make it happen,” said James Knightley, ING’s chief international economist.

Interest rate cuts are very much on the table for next year. The 2-year or 10-year yield curve inverts to multi-year lows. It would be difficult to avoid a complete recession.

Additional reporting by Kate Dugwid

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