WASHINGTON – The Federal Reserve on Wednesday raised its benchmark interest rate by three-quarters of a point for the second consecutive time in its most aggressive campaign in more than three decades to rein in high inflation.
The Fed’s decision will raise its key rate, which affects many consumer and business loans, to a range of 2.25% to 2.5%, its highest level since 2018.
Speaking at a press conference after the Fed’s latest policy meeting, Chairman Jerome Powell offered mixed signals on the central bank’s likely next steps. He stressed that the Fed remained committed to beating chronically high inflation, while ruling out the possibility that it could soon downgrade to lower rate hikes.
And even as concerns grow that the Fed’s efforts could eventually cause a recession, Powell passed up several opportunities to say the central bank would slow its hikes if a recession occurs while inflation is still high. .
Roberto Perli, an economist at Piper Sandler, an investment bank, said the Fed chairman stressed that “even if this causes a recession, it’s important to get inflation down.”
But Powell’s suggestion that rate hikes could slow now that its key rate is roughly at a level that should neither support nor restrain growth helped trigger a powerful rally on Wall Street, the S&P stock index 500 jumped 2.6%. The prospect of lower interest rates generally fuels stock market gains.
At the same time, Powell was careful at his press conference not to rule out another three-quarter point hike at the next meeting of Fed policymakers in September. He said the rate decision will depend on what emerges from the many economic reports that will be released by then.
“I don’t think the United States is currently in a recession,” Powell said during his press conference in which he suggested that the Fed’s rate hikes had already been successful in slowing the economy and possibly reduce 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 rising prices across the economy . By raising borrowing rates, the Fed is making it more expensive to take out a mortgage, car or business loan. Consumers and businesses are likely to borrow and then spend less, which cools the economy and slows inflation.
Soaring inflation and fears of a recession have eroded consumer confidence and fueled public anxiety about the economy, which is sending frustrating and mixed signals. And with November’s midterm elections approaching, American discontent has lowered President Joe Biden’s public approval rating and increased the likelihood that Democrats will lose control of the House and Senate.
The measures taken by the Fed to tighten credit significantly have torpedoed the housing market, which is particularly sensitive to changes in interest rates. The average 30-year fixed mortgage rate has more or less doubled over the past year to 5.5% and home sales have plummeted.
Consumers are showing signs of reduced spending in the face of high prices. And business surveys suggest sales are slowing. The central bank is betting it can slow growth just enough to bring inflation under control, but not so much as to trigger a recession – a risk many analysts fear will end badly.
At his press conference, Powell suggested that with the economy slowing, demand for workers declining slightly and wage growth possibly peaking, the economy is moving in a way that should help reduce inflation.
“Are we seeing the slowdown in economic activity that we think we need? He asked. “There is evidence that we are.”
The Fed chairman also pointed to metrics suggesting investors expect inflation to return to the central bank’s 2% target over time, a sign of confidence in his policies.
Powell also maintained a forecast Fed officials made last month that their benchmark rate will reach a range of 3.25% to 3.5% by the end of the year and about half a point of percentage more in 2023. This forecast, if it holds, would mean a slowdown in Fed hikes. The central bank would meet its end-of-year target if it raised its key rate by half a point at its September meeting and by a quarter point at each of its November and December meetings.
With the Fed now having imposed two substantial rate hikes in a row, “I think they’re going to tiptoe out of here,” said Thomas Garretson, senior portfolio strategist at RBC Wealth Management.
When the government estimates gross domestic product for the April-June period on Thursday, some economists believe it could show the economy has contracted for a second consecutive quarter. This would answer a long held assumption about the onset of a recession.
But economists say that would not necessarily mean a recession has started. In those same six months when the overall economy might have contracted, employers added 2.7 million jobs — more than in most entire years before the pandemic. Wages are also rising at a healthy pace, with many employers still struggling to attract and retain enough workers.
Yet slowing growth puts Fed policymakers in a high-risk dilemma: How much should they raise borrowing rates if the economy slows? Lower growth, if it causes layoffs and increases unemployment, often reduces inflation on its own.
This dilemma could become even more important for the Fed next year, when the economy could be in worse shape and inflation is likely to still exceed the central bank’s 2% target.
“How much recession risk are you willing to bear to bring (inflation) down to 2%, quickly, over several years? asked Nathan Sheets, a former Fed economist who is chief global economist at Citi. “Those are the kinds of issues they’re going to have to grapple with.”
Bank of America economists forecast a “mild” recession later this year. Goldman Sachs analysts estimate a 50-50 probability of a recession within two years.
AP Economics Writer Paul Wiseman contributed to this report.