The Fed raises rates by 0.75 points for the second consecutive month

The Federal Reserve raised its benchmark policy rate by 0.75 percentage points for the second consecutive month on Wednesday as it doubled down on its aggressive approach to rein in soaring inflation despite early signs that the U.S. economy was starting to to run out of steam.

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

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

The decision, which was unanimously backed, extended a series of interest rate hikes that began in March and intensified in size as the Fed’s battle to fight inflation intensifies.

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

The new target range is now close to what most officials consider to be the “neutral rate” which neither stimulates nor restrains growth if inflation is at the 2% target.

With inflation functioning At its fastest pace in more than four decades, further interest rate hikes are expected well into the second half of 2022, but the pace of those increases is hotly debated. Economists are divided on whether the central bank will implement another rate hike of 0.75 percentage points at its next meeting in September or opt for a smaller hike of half a point.

On Wednesday, the Fed acknowledged early indications that the economy is starting to slow, but has shown few signs of abandoning its “unconditional commitment” to restoring price stability.

In its statement, the central bank changed its assessment of the economy, noting that “recent spending and output indicators have softened,” a more negative outlook than last month when it said “activity economic seems[ed] picked up”.

Senior officials have previously said that leaving inflation unchecked and allowing it to become “entrenched” would be a worse outcome than acting too aggressively.

The fed funds rate is expected to reach around 3.5% this year, a level that will more actively limit economic activity. Most officials believe the policy needs to become “tight” in order to reduce demand to a level where price growth is limited.

Officials have previously signaled that there must be “clear and convincing” evidence that inflation is beginning to ease before the Fed eases its efforts to tighten monetary policy.

Central bank policymakers want to see a slew of monthly inflation readings decelerate, but economists warn that may not happen for months, at least for ‘basic’ readings weeding out volatile items such as the food and energy.

In June, basic goods and services recorded an alarming jump of 0.7%, led by a sharp rise in rent and other accommodation costs and other expenses likely to remain elevated through the fall.

The Fed raised rates just a day before the release of gross domestic product figures, which could show a second consecutive quarter of contraction in economic growth. That would meet one of the common criteria for a technical recession, but officials pointed to other signs of economic strength, including the robust labor market — to challenge this suggestion.

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

Officials still maintain that inflation can be brought back to the Fed’s 2% target without excessive job losses, although they acknowledged that the path to that outcome has become narrower.

Markets were little moved in response to the statement, suggesting the 0.75 percentage point rise was fully anticipated by investors.

A slight rise in the two-year yield pushed the spread between two- and 10-year yields further into negative territory, to its lowest level since 2000. The two-year yield moves with interest rate expectations. 10-year interest and movements with economic growth expectations.

Ashish Shah, chief investment officer at Goldman Sachs Asset Management, said: “It was a number as expected. A lot of the drama has come out at this point. We are past the peak of aggressiveness.

“The Fed is taking advantage of being so verbally aggressive[in signalling future rate rises]. . . They managed to tighten financial conditions quickly before the actual tightening and we are seeing the effects,” he added.

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

“Rate cuts are firmly on the cards for next year. The two- and ten-year yield curve is inverting to multi-year lows. It’s going to be hard to avoid a full recession,” he said. he adds.

Additional reporting by Kate Duguid

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