For the second straight month, US Federal Reserve raised interest rates by 75 basis points. According to a report by Bloomberg, its Chairman Jerome Powell left the same move again on the table for its next monetary policy meeting scheduled in September.
US policy makers, witnessing the highest cost pressures in 40 years, lifted the target for the federal funds rate on Wednesday to a range of 2.25 per cent to 2.5 per cent. Cumulatively that takes the June-July hike to 150 basis points, the steepest since the price-fighting era of Paul Volcker in the early 1980s, the news agency reported.
Powell in a press conference following a two-day policy meet in Washington said, “While another unusually large increase could be appropriate at our next meeting.” The Fed will also slow the pace of increases at some point, Powell said, while adding, officials would set policy on a meeting-by-meeting basis rather than offer explicit guidance on the size of their next rate move, as he has done recently.
His comments triggered a rally in US stocks, besides global equity markets also opened in the green, with Treasury yields tumbling along with the dollar.
In a statement, Fed said, “The Federal Open Market Committee (FOMC) is strongly committed to returning inflation to its 2 per cent objective,” repeating previous language that it’s “highly attentive to inflation risks.” The FOMC reiterated it “anticipates that ongoing increases in the target range will be appropriate,” and that it would adjust policy if risks emerge that could impede attaining its goals.
The FOMC vote, which included two new members, Vice Chair for Supervision Michael Barr and Boston Fed President Susan Collins, was unanimous.
The Fed officials, who were criticised for misjudging inflation and being slow to respond, are now forcefully raising interest rates to tame the surging inflation, even if that risks tipping it into recession.
Higher rates are already playing an impact on the US economy and the effects are quite evident in the realty market, where sales have dried up.
While Fed officials maintain that they can still manage a soft landing for the economy and avoid a steep downturn, but a number of analysts pointed out that it will take a recession with mounting unemployment to significantly slow price gains.
Powell, however, said that he did not believe the economy was in recession, citing a “very strong labour market” as evidence.
The latest increase puts rates near Fed policy makers’ estimates of neutral, the level that neither speeds up nor slows down the economy. Forecasts in mid-June showed officials expected to raise rates to about 3.4 per cent this year and 3.8 per cent in 2023.
Now, investors are on watch mode. They will see if the Fed slows the pace of rate hikes in September, or if strong inflationary pressure compelled the central bank to continue with some major hikes.