Fed hikes interest rates by 0.75 percentage points for the second consecutive time to fight inflation

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Fed hikes interest rates by 0.75 percentage points for the second consecutive time to fight inflation: The Federal Reserve raised interest rates by 0.75 percentage points on Wednesday, the second time in as many days that it has done so in an effort to rein in inflation without triggering a recession.

Since the Federal Reserve began utilizing the overnight fund’s rate as a primary tool of monetary policy in the early 1990s, the adjustments in June and July have raised the benchmark overnight borrowing rate to a range of 2.25 percent -2.5 percent.

In addition to directly affecting short-term lending rates, the fed funds rate influences a wide range of consumer products, including adjustable mortgages, automobile loans, and credit cards. The fund’s rate has risen to its highest level since December 2018, when it was at a record low.

After a series of announcements from Fed officials since the June meeting, markets were generally anticipating the rise in interest rates. As a result of the open door left by Fed Chair Jerome Powell, the stock market surged to its highest level since March. The significance of lowering inflation has been highlighted by central bankers, even if it means slowing the economy.

A slowdown in rate hikes is likely to be necessary as the stance of monetary policy tightens further, according to Federal Reserve Chairman Jerome Powell.

“Recent indices of expenditure and production have eased,” the Federal Open Market Committee said in a post-meeting statement.

While job creation has been strong recently and unemployment has been low, a statement similar to that issued in June by the committee was issued as a follow-up. Inflation was once again classified as “elevated” and blamed on supply chain concerns, rising food and energy prices, and “broader price pressures,” according to officials.

Unanimously, the board agreed to raise the rate. Esther George, the president of the Kansas City Federal Reserve, argued for a half-percentage point hike in June.

In a year that began with interest rates hovering around zero, a widely used inflation measure has risen by 9.1 percent. However, in 2020, the Federal Reserve changed its goal for inflation from 2% to 3% in order to ensure that all Americans have access to full and equal employment.

A slowdown in economic growth and the tightening of the labor market could be the price of the Fed’s “strong commitment” to decreasing inflation, Powell warned.

“We believe that growth should be slowed down. “This year’s growth is going to slow down for a variety of reasons,” he stated. The economy, he said, is likely to grow at a lower rate than its long-term average for some time. In order for us to have some room to expand, we believe we need a time of growth below our potential.

The unemployment rate remained at 3.6% in June, which is close to full employment. Core personal consumption expenditures inflation, which stood at 4.7 percent in May, is way off the Fed’s objective of 3.5 percent.

Inflation-fighting initiatives have a number of hazards. The U.S. economy is on the verge of a recession due to rising prices, which is reducing consumer spending and reducing company activity.

The economy shrank by 1.6% on an annualized basis in the first quarter, and investors were preparing for a figure for the second quarter due out Thursday, which might show successive drops, a common indicator of a recession. According to the Dow Jones forecast, Thursday’s report is expected to show a rise of 0.3%.

In addition to raising interest rates, the Federal Reserve is lowering the size of its almost $9 trillion balance sheet by selling assets. The Federal Reserve began allowing some of the revenues from aging bonds to roll off in June.

Since the beginning of the roll-off, the balance sheet has decreased by just $16 billion, despite the Fed setting a cap of $47.5 billion that might have been wound down. As the summer progresses, the monthly cap will grow to $95 billion by September. It’s called “quantitative tightening” in the markets, and it’s another way the Fed manipulates financial circumstances.

Markets expect the Fed to raise interest rates by at least a half percentage point in September, in addition to the faster balance sheet runoff. As of Wednesday afternoon, CME Group statistics showed that traders were placing around a 53% probability on a third straight 0.75 percentage point, or 75 basis point, hike in September.

There will be no FOMC meetings in August, but the Fed will hold its annual retreat in Jackson Hole, Wyoming.

Although Fed predictions announced in June imply no cuts until at least 2024, the markets expect them to start decreasing rates next summer.

Several government officials have stated that they want to raise interest rates aggressively until September before evaluating the impact on inflation. However, despite the 1.5 percentage point rise in the Consumer Price Index between March and June, June’s rent index was at its highest level since April 1986, while dental care prices set a new record in data going back to 1995.

As inflation began to rise in 2021, the central bank was criticized for being too reluctant to implement a tightening policy, as well as for perhaps going too far and precipitating a more severe economic collapse.

According to Sen. Elizabeth Warren (D-Mass. ), who spoke to CNBC on Wednesday, she is concerned that the Fed’s rate hikes would raise unemployment, putting the country’s poorest citizens at risk.