Christopher Rugaber, The Associated Press Published Wednesday, June 15, 2022 2:09 PM EDT Last Updated on Wednesday, June 15, 2022 5:53 PM EDT
WASHINGTON (AP) – Federal Reserve intensified its fight against high inflation on Wednesday, raising its key interest rate by three-quarters of a point – the biggest rise since 1994 – and pointing to higher rate hikes ahead while trying to cool the US economy without causing a recession.
The unusually high rate hike came after data released on Friday showed that US inflation rose last month to a four-decade high of 8.6%, a staggering leap that made financial markets worry about how the Fed would respond. The Fed’s short-term benchmark, which affects many consumer and business loans, will now be in the range of 1.5% to 1.75%, and Fed officials predict that this range will double at the end of the year.
“We thought strong action was justified at this meeting, and we did,” Fed Chairman Jay Powell told a news conference, stressing the central bank’s commitment to do whatever it takes to get back inflation at the Fed’s target rate of 2%, although this led to a slightly higher unemployment rate.
Powell said it was essential to go bigger than the Fed’s half-point increase previously indicated because inflation was rising more than expected, causing particular difficulties for low-income Americans and consolidating the public’s view that stubbornly high inflation will not be easily resolved. .
Powell said another three-quarters-point rise is possible at the next Fed meeting in late July if inflationary pressures remain high, though he said such increases would not be common. He said the economy is strong enough to withstand higher rates without falling into recession, a prospect many economists are increasingly concerned about.
Some financial analysts suggested that Powell had struck the right balance to reassure the markets, which recovered on Wednesday. “We want to bring inflation down,” said Robert Tipp, chief investment strategist at PGIM Fixed Income.
Still, Fed action on Wednesday was a recognition that it is struggling to slow the pace and persistence of inflation, which is fueled by a strong labor market, pandemic-related supply disruptions and the rise. of energy prices that have been aggravated by the invasion of Ukraine by Russia. .
Some analysts said they welcomed the Fed’s more aggressive stance. “The more the Fed does now, the less it will have to do afterwards,” said Thomas Garretson, RCB Wealth Management’s senior portfolio strategist.
Matthew Luzzetti, chief economist at Deutsche Bank, said Powell was right in acknowledging that the faster rate hike would hurt consumers. “It will be a much more bumpy trip to reduce inflation than previously planned,” Luzzetti said.
Inflation has peaked at voter concerns in the months leading up to the midterm elections in Congress, worsening the public’s view of the economy, weakening President Joe Biden’s approval ratings and increasing the likelihood of losses. Democrats in November. Biden has tried to show that he recognizes the pain that inflation is causing in American households, but has struggled to find political actions that can make a real difference. The president has stressed his belief that the power to curb inflation lies primarily with the Fed.
However, the Fed’s rate hikes are strong tools to try to reduce inflation while maintaining growth. Scarcity of oil, gasoline and food contributes to rising prices. Powell said several times during the press conference that these factors are beyond the Fed’s control and may force it to push rates even higher to end inflation.
Borrowing costs have already risen sharply in much of the U.S. economy in response to Fed moves, with the 30-year average fixed-rate mortgage rate hovering above 5%, its highest level since before. the financial crisis of 2008, compared to only 3% at the beginning. of the year.
Even if a recession can be averted, economists say it is almost inevitable that the Fed will have to inflict some pain, probably in the form of higher unemployment, such as the price of defeating chronically high inflation.
Powell made a defensive note when asked if the Fed was now prepared to accept a recession as a price to curb inflation and bring it closer to the Fed’s target of 2%.
“We’re not trying to induce a recession now,” he said. “It simply came to our notice then. We are trying to achieve 2% inflation. “
In their updated forecasts on Wednesday, Fed officials said that after this year’s rate hikes, they expect two more rate hikes by the end of 2023, when they expect inflation to finally fall below 3 %, close to your target level. But they expect inflation to still be 5.2% by the end of this year, well above what they had estimated in March.
Over the next two years, officials expect a much weaker economy than expected in March. They expect the unemployment rate to reach 3.7% by the end of the year and 3.9% by the end of 2023. These are only slight increases from the current unemployment rate of 3.6%. But it is the first time since it began raising rates that the Fed has acknowledged that its actions will weaken the economy.
The central bank has also drastically lowered its economic growth projections to 1.7% this year and next. This is below their March forecast, but better than some economists expect from a recession next year.
Even if the Fed handles the tricky trick of curbing inflation without causing it to fall, higher rates, however, will put pressure on stocks. The S&P 500 has already sunk more than 20% this year, meeting the definition of a bear market.
On Wednesday, the S&P 500 was up 1.5%. The two-year Treasury yield fell to 3.23% from 3.45% on Tuesday afternoon, and the biggest move came after Powell said he did not expect interest rate hikes. 0.75 percentage points were common.
Other central banks are also acting to try to stifle inflation, even with their nations at greater risk of recession than the US.
The European Central Bank is expected to raise rates by a quarter of a point in July, its first increase in 11 years. It could herald a larger rise in September if record inflation levels persist. On Wednesday, the ECB pledged to create market support that could protect member countries from financial turmoil of the kind that erupted during a debt crisis more than a decade ago.
The Bank of England has raised rates four times since December to a 13-year high, despite forecasts that economic growth will remain unchanged in the second quarter. The BOE will hold an interest rate meeting on Thursday.