Fed raises interest rate anew to slow inflation

WASHINGTON, D.C.: In a widely expected move, the Federal Reserve (Fed) on Wednesday raised its benchmark interest rate by a hefty three-quarters of a point for a second straight time in its most aggressive drive in more than three decades to tame high inflation.

The United States central bank’s move will raise its key rate, which affects many consumer and business loans, to 2.25 percent to 2.5 percent, its highest level since 2018.

At a news conference after the Fed’s latest policy meeting, Chairman Jerome Powell offered mixed signals about the central bank’s possible next moves. He stressed that the Fed remained committed to defeating chronically high inflation while holding out the possibility that it might soon downshift to smaller rate hikes.

And even as worries grew 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 occurred while inflation was still high.

Roberto Perli, an economist at investment bank Piper Sandler, said the Fed chief emphasized that “even if it causes a recession, bringing down inflation is important.”

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But Powell’s suggestion that rate hikes could slow, now that its key rate is roughly at a level believed to neither support nor restrict growth, helped ignite a powerful rally on Wall Street, with the S&P 500 stock market index surging 2.6 percent. The prospect of lower interest rates generally fuels stock market gains.

At the same time, Powell was careful during his news conference not to rule out another three-quarter-point hike when policymakers next meet in September. He said that rate decision would depend upon what emerged from the many economic reports to be released between now and then.

“I do not think the US is currently in a recession,” Powell said at his news conference, in which he suggested that the Fed’s rate hikes already had some success in slowing the economy and possibly easing inflationary pressures.

The central bank’s decision follows inflation reaching 9.1 percent last month, the fastest annual rate in 41 years, and reflects its strenuous efforts to slow price gains across the economy. By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an automobile or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.

Mixed signals

The surge in inflation and fear of a recession have eroded consumer confidence and stirred public anxiety about the economy, which is sending frustratingly mixed signals. And with the November midterm elections nearing, Americans’ discontent has diminished US President Joe Biden’s public approval ratings and increased the likelihood that the Democrats would lose control of the Senate and House of Representatives.

The Fed’s moves to sharply tighten credit have torpedoed the housing market, which is especially sensitive to interest rate changes. The average rate on a 30-year fixed mortgage has roughly doubled in the past year to 5.5 percent, and home sales have tumbled.

Consumers are showing signs of cutting spending in the face of high prices. And business surveys suggest that sales are slowing. The central bank is betting that it can slow growth just enough to tame inflation yet not so much as to trigger a recession — a risk that many analysts fear may end badly.

Powell suggested that with the economy slowing, demand for workers easing modestly and wage growth possibly peaking, the economy is evolving in a way that should help reduce inflation.

“Are we seeing the slowdown in economic activity that we think we need?” he asked. “There’s some evidence that we are.”

The Fed chairman also pointed to measures that suggest that investors expect inflation to fall back to the central bank’s 2-percent target over time as a sign of confidence in its policies.

Powell also stood by a forecast Fed officials made last month that their benchmark rate would reach 3.25 percent to 3.5 percent by year-end and roughly a half-percentage point more in 2023. That forecast, if it holds, would mean a slowdown in the Fed’s hikes. The central bank would reach its year-end target if it were to raise its key rate by a half-point when it meets in September and by a quarter-point at each of its meetings in November and December.