On Wednesday, the Federal Reserve took an aggressive step to combat rising inflation by announcing a larger-than-usual, three-quarter interest rate hike. The increase comes as central bank officials face a tough balancing act: taming rising rates amid growing concerns about an economic slowdown.
The latest increase brings the federal funds rate between 2.25% and 2.50%, the highest it reached in the summer of 2019 before the coronavirus pandemic.
It marks fourth rate increase Consumer prices rose at the fastest rate in more than 40 years. Five months ago, the federal funds rate was close to zero percent. At its June meeting, the Federal Open Market Committee raised the federal funds rate by a more aggressive 75 basis points for the first time in nearly 30 years, following increases of 25 basis points and 50 basis points in its March and May meetings, respectively.
With consumer prices up more than 9% from a year ago, further rate hikes are expected before the end of the year. At their meeting last monthFed officials have predicted that the discount rate will increase to more than 3% by 2023. The committee will meet again in September, November and December.
The Federal Reserve has indicated that it expects further interest rate hikes. On Wednesday, Federal Reserve Chairman Jerome Powell said another “extraordinarily large” interest rate hike at the next meeting may be “appropriate,” but the committee is meeting to make that decision and hikes are likely to slow. Powell announced the possibility of additional increases next year.
Increases in the federal funds rate have led to higher borrowing costs for Americans. According to Greg McBride, chief financial analyst at Bankrate.com, variable-rate debt such as credit cards and home equity lines of credit will be most affected.
“Consumers should look into low-interest credit card balance transfer offers and do so urgently to protect against interest rate hikes and make progress on paying down debt,” McBride said. “Ask your lender if fixing the interest rate on your outstanding home equity balance is an option.”
The federal funds rate hike comes alongside a slew of other key economic data scheduled for release this week. On Thursday, the Commerce Department will release its GDP report for the second quarter of 2022, which could show signs that the U.S. is in recession after a measure of economic activity fell in the first quarter of the year.
On Monday, President Biden said during an event that the United States is not in recession and noted that the unemployment rate is close to the pre-pandemic level of 3.6%. Over the weekend, Treasury Secretary Janet Yellen, who also previously served as chair of the Federal Reserve, acknowledged in an interview that the economy is slowing, but said it is not an economy in recession. Whether or not the US is in a recession is determined by the National Bureau of Economic Research. Yellen argues that the economy is in transition.
“I don’t think the United States is in recession right now,” Powell said. He noted that there are many sectors of the economy that are functioning “very well”. Powell specifically addressed the labor market, saying that job growth has slowed, but that’s expected. “It’s a very strong job market.”
The Commerce Department will also release its latest report on the Consumer Price Index for June, the preferred inflation gauge used by the Federal Reserve, on Friday.
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