Fed hikes rates by three-quarters of a percentage point to fight inflation

Fed hikes rates by three-quarters of a percentage point to fight inflation
Fed hikes rates by three-quarters of a percentage point to fight inflation

Fed hikes rates by three-quarters of a percentage point to fight inflation

The Fed raised interest rates by 0.75% for the second time in a row to fight inflation

key points

• The Federal Reserve on Wednesday imposed a second consecutive 0.75 percentage point interest rate hike, taking its benchmark rate to a range of 2.25%-2.5%.

• Chair Jerome Powell said there will be a point where the Fed will begin to slow hikes to assess their impact.

• “We actually think we need as short a growth period as possible to create some affordability,” he said.

Federal Reserve raises interest rates by 75 basis points as it steps up fight against inflation

The Federal Reserve on Wednesday imposed a second straight 0.75 percentage point interest rate hike as it tries to curb runaway inflation without triggering a recession

three quarters of a percentage point meaning

.

In moving the benchmark overnight borrowing rate to a range of 2.25%-2.5%, the measures in June and July represented the most consistent tightening since the Fed began to tighten monetary policy in the early 1990s. had started using the overnight funds rate as the principal tool. .

Although the fed funds rate most directly affects what banks charge each other for short-term loans, it feeds into many consumer products such as adjustable mortgages, auto loans and credit cards. The hike takes the funds rate to its highest level since December 2018.

Markets had widely expected the move after telegraphing a string of hikes in Fed officials’ statements since the June meeting. Stocks hit new highs after Fed Chair Jerome Powell left the door open on his next move at a September meeting, saying it would depend on data. Central bankers have stressed the importance of reducing inflation even if it means slowing the economy.

“As the stance of monetary policy tightens, it will likely be appropriate to reduce the pace of hikes while we assess how our overall policy adjustments will affect the economy and inflation,” Powell said. affecting inflation,” Powell said.

Fed Powell: We will make rate hike decisions on a meeting-by-meeting basis

Fed hikes rates by three-quarters of a percentage point to fight inflation
Fed hikes rates by three-quarters of a percentage point to fight inflation

In its statement after the meeting, the rate-setting Federal Open Market Committee warned that “recent indicators of spending and output have softened.”

fed raises rates

“Nevertheless, employment has grown strongly in recent months, and the unemployment rate has remained low,” the committee added, using similar language to the June statement. Officials again described inflation as “elevated” and attributed the situation to supply chain issues and high food and energy prices, as well as “significant price pressures”.

Powell said he did not think the economy was in recession, even though growth was negative in the first quarter and was expected to be barely positive in the second quarter.

“Think about what a recession is. It’s a broad-based decline in many industries that persists for more than a few months. It doesn’t look like that anymore,” he said. “The main reason is that the labor market has been such a strong indicator of economic strength that it makes you question the GDP numbers.”

The rate hike was unanimously approved. In June, Kansas City Fed President Esther George disagreed, advocating a slowdown with a half-percentage-point hike.

The increase comes in a year that started with rates hovering around zero but in which the commonly quoted measure of inflation has run at 9.1 percent a year. The Fed aims for inflation to be around 2%, although it adjusted that target in 2020 to allow it to remain slightly warmer in the interest of full and inclusive employment.

Powell said the Fed was “strongly committed” to reducing inflation and said this could come at a cost to general economic growth and the labor market in particular.

“We think it is necessary to slow down growth. Growth is going to slow down this year for a number of reasons,” he said. He added that the economy may grow below its long-term trend for a period. “We actually think we need as little development time as possible to create some slack.”

In June, the unemployment rate was at 3.6 percent, near full employment. But inflation, even by the Fed’s benchmark of core personal consumption expenditures, which was 4.7 percent in May, is well off target.

fed rate hike meaning

Jerome Powell says the real question is whether we are headed for 2 percent inflation.

Efforts to reduce inflation are not without risk. The US economy is teetering on the brink of recession as inflation reduces consumer purchases and affects business activity.

First-quarter GDP fell an annualized 1.6 percent, and markets were bracing for a second-quarter reading on Thursday that could show a sustained decline, widely used to signal a recession. It’s a barometer of what’s happening. Thursday’s reading on the Dow Jones estimates growth of 0.3 percent.

Along with the rate hike, the Fed is reducing the volume of assets on its roughly $9 trillion balance sheet. Beginning in June, the Fed began allowing some proceeds from maturing bonds to roll off.

The balance sheet has shrunk by only $16 billion since the start of the rolloff, though the Fed

Its limit is fixed.

Fed hikes rates by three-quarters of a percentage point to fight inflation
Fed hikes rates by three-quarters of a percentage point to fight inflation

p to $47.5 billion that could potentially have been eliminated. The cap will increase over the summer, eventually reaching $95 billion a month by September. This process is known in the markets as “quantitative tightening” and is another mechanism the Fed uses to influence financial conditions.

With the balance sheet run-off accelerating, markets expect the Fed to raise rates by at least another half percentage point in September. Traders on Wednesday afternoon had assigned about a 53 percent chance the central bank would hike further, the third straight increase of 0.75 percentage points, or 75 basis points, in September, according to CME Group data.

The FOMC does not meet in August, but officials will gather in Jackson Hole, Wyoming, for the Fed’s annual retreat.

Markets expect the Fed to begin cutting rates by next summer, although the committee’s projections released in June show no rate cuts until at least 2024.

A number of officials have said they expect to hike aggressively until September and then assess what impact these measures have had on inflation. Despite the increase – a total of 1.5 percentage points between March and June – June’s consumer price index reading was the highest since November 1981, the rent index was at its highest level since April 1986 and dental care costs Hitting records in data series going back to 1995.

The central bank has faced critics, both for being too slow to tighten when inflation first started to pick up in 2021, and for potentially going too far and causing a more severe economic downturn. .

While many individual households are struggling, U.S. consumers still collectively have about $2 trillion in pandemic savings, said PNC Chief Economist Gus Foucher. Combined with a stable employment base, these savings have allowed households to weather most of the inflationary environment, he said.

Still, it is unclear whether the Fed will be able to accomplish the balancing act of reducing inflation while avoiding broader economic damage. Many economists are now worried about both the inflation rate, which has hit a four-decade high, and gross domestic product, which could indicate that the U.S. economy has contracted for two straight quarters. has contracted — the technical definition of a recession. On Thursday, the Bureau of Labor Statistics will release the latest GDP data.

Economic Research, a private, nonpartisan group, has the authority to officially make such a declaration.

In a note to clients on Friday, Chris Williamson, chief business economist at S&P Global Market Intelligence, wrote that U.S. output is falling at a rate not seen since 2009, excluding pandemic months.

“Manufacturing has ground to a halt and the service sector’s recovery from the pandemic has gone into reverse, as rising costs of living, high interest rates and growing gloom about the economic outlook have overwhelmed rising demand. is gone,” he said.

There are still some bright spots in the economy. Unemployment is low at 3.6% and the job market remains strong. While the Fed remains focused on tightening monetary policy, it remains to be seen how well its efforts will translate into the broader economy.

With prices rising at their fastest pace in a generation, the Federal Reserve is stepping up its fight against inflation.

On Wednesday, the Fed raised its benchmark interest rate by an additional three-quarters of a percentage point. This is the fourth time this year that the central bank has hiked rates.

That follows a similar-sized hike in June — a rate hike at a pace not seen since the late 1980s.

Despite these fast and furious moves, the central bank has its work cut out for it. Its aim is to curb inflation without triggering a recession.

“The labor market is extremely tight, and inflation is very high,” Fed Chair Jerome Powell said at a news conference, where he described the “unusually large” rate hike.

He and his colleagues are trying to fight inflation by managing demand. They are raising the cost of credit – what consumers and companies pay to borrow money – and are trying to deal with a jobs market that the Fed chair called “unsustainably hot”, where wages is growing rapidly as many businesses are paying more. to find workers.

The economy is creating jobs, but housing has slowed.

Powell and his colleagues on the Federal Open Market Committee are tracking the economic data closely, but they are mixed.

On the one hand, inflation did not peak in May. The consumer price index rose in June, thanks mostly to energy prices.

On the other hand, the labor market remained strong. In June, it added 372,000 new jobs — more than Wall Street expected, bringing the total number of jobs for the first half of the year to 2.7 million.

According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage is now 5.54%, nearly double from the start of the year, which has put off many buyers. Disadvantages of a new home

Trucks and sales have also declined.

Then, there is the stock market. This year, the broad-based S&P 500 estimate

The Dow is down 17%, and the tech-heavy Nasdaq, which is in a bear market, is down nearly 25%.

Later this week, the Commerce Department will release its quarterly report card on economic growth. In the first three months of the year, gross domestic product fell by 1.4 percent.

“There is a lot of evidence that economic growth slowed in the first half of this year,” said Ryan Wang, US economist at HSBC.

Economic numbers are hard to process.

But there is no explanation in the data.

“Cross currents” make these numbers difficult to process, says Michael Gapen, head of U.S. economics research at Bank of America Securities.

“When you have data points that contradict each other, you have to ask yourself, ‘Who do you believe?'” he says. “Trust devices you trust.federal reserve

Economists know that data distortions decrease over time. The US Department of Labor revises its monthly jobs numbers, for example, and the GDP data we’ll get on Thursday is just the Commerce Department’s first estimate.

But in the moment, it’s hard for Powell and his colleagues to be patient. Inflation has become a political issue as rising prices weigh heavily on consumer sentiment.

According to a recent Morning Consult/Politico poll, 65% of registered voters believe the U.S. economy is currently in a recession. This is despite the fact that a recession has not been declared by the National Bureau of Economic Research, the nonprofit group that officially makes the decision.

“Doing nothing at this stage – not getting the inflation problem under control – potentially means it’s even harder to correct course later,” says Gapen. “If inflation picks up, and long-term inflation expectations rise, history suggests that the spiral will be very difficult to break, and the likelihood of a recession will be much deeper.”

Some prices are coming down.

Fed hikes rates by three-quarters of a percentage point to fight inflation
Fed hikes rates by three-quarters of a percentage point to fight inflation

Like Powell, economists are scrutinizing the data, looking for signs that the Fed’s policies are working.

Michelle Mayer, chief U.S. economist at the MasterCard Economics Institute, sees some promising signs.

Oil prices are falling and gas prices have fallen. According to AAA, the average price of a gallon of regular gas is $4.33, down about $0.69 from its record high price set in June.

“If you look at a wide range of commodity prices in the markets, they’re starting to come down,” Meyer says. “Inventory levels are starting to rise for certain categories. Supply chains are starting to open up so production costs are coming down.”

These data can give Powell confidence that what he and his colleagues are trying to engineer is working.

Effect of Fed Rate Increase on the Economy

Wednesday’s rate hike is expected to boost the economy, leading to a sharp increase in rates on credit cards, home equity lines of credit and other loans. Fixed, 30-year mortgage rates have risen to an average of 5.54 percent from 3.22 percent earlier this year. At the same time, households, especially the elderly, are finally enjoying higher yields on bank savings after years of modest returns.

Although recent indicators of spending and output have softened, job growth has been strong in recent months, and the unemployment rate has remained low, the Fed said in a statement after the two-day meeting. Inflation remains elevated due to the pandemic, rising food and energy prices and widespread price hikes, it added.

“The Committee remains committed to returning inflation to its 2% objective,” the Fed said in its announcement.

To put the Fed’s aggressive rate hike campaign into perspective, the fed funds rate was close to zero at the start of the year – a legacy of efforts to pull the nation out of a COVID-19-induced recession.

Stocks rose after Powell said the Fed’s priority was to lower inflation but acknowledged that would raise the unemployment rate. The Dow Jones Industrial Average closed up 436 points, or 1.4 percent. Meanwhile, the S&P 500 closed 103 points, or 2.6 percent, higher. The Nasdaq Composite saw the biggest gains on Wednesday. It closed 470 points higher or 4 percent.

Yields on 10-year Treasury notes fell to 2.783% and one-year to 3.015%.fed rate hike time

According to the Consumer Price Index (CPI), the Fed had no choice but to approve another three-quarter point rate hike, with annual inflation hitting a new 40-year high of 9.1 percent in June, economists say. After arriving. Also, employers added 372,000 jobs last month.

And there are indications that the inflation rate is going to slow down in the second half of the year. Oil prices have fallen sharply since mid-June, with lower gas prices, and other commodity prices, including wheat, corn and copper, fueling fears of a global recession.

Meanwhile, supply chain disruptions that lead to product shortages are easing. Dollar strengthened, prices of imported goods fell. And retailers are stuck with bloated inventory after order.

Using too many products to deal with supply problems. it means

That there is a possibility of heavy discounts.

PCE inflation vs. CPI

While the public primarily watches inflation rise and fall through the CPI, or consumer price index, the Fed has long preferred the personal consumption expenditures (PCE) price index to gauge inflation.

“It’s better to capture the inflation that people face in their lifetime,” Powell said.

fed interest rates 2022

Annual growth in the PCE index was 6.3% in May, compared to 8.6% for the CPI.

Although the two measures move together over time, the CPI weighs more heavily than the PCE index on food, gas, cars and housing, he said.

“So, we’ll be looking at both,” he said. “But again, what we think is the best measure has always been PCE.”

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