Fed unleashes another big rate hike in bid to curb inflation
Friday 29 July 2022
The 75-basis-point increase brings the key rate to the highest level since 2018.
The Federal Reserve raised its benchmark interest rate by a hefty three-quarters of a point for a second straight time in its most aggressive drive in three decades to tame high inflation.
The Fed’s move 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.
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 price gains across the economy. By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.
The Fed is tightening credit even while the economy has begun too slow, thereby heightening the risk that its rate hikes will cause a recession later this year or next. 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.
The central bank is betting that it can slow growth just enough to tame inflation yet not so much as too trigger a recession — a risk that many analysts fear may end badly.
Among analysts who foresee a recession, most predict that it will prove relatively mild. The unemployment rate, they note, is near a 50-year low, and households are overall in solid financial shape, with more cash and smaller debts than after the housing bubble burst in 2008.
Fed officials have suggested that at its new level, their key short-term rate will neither stimulate growth nor restrict it — what they call a “neutral” level. Chair Jerome Powell has said the Fed wants its key rate to reach neutral relatively quickly.
Should the economy continue to show signs of slowing, the Fed may moderate the size of its rate hikes as soon as its next meeting in September, perhaps to a half-point. Such an increase, followed by possibly quarter-point hikes in November and December, would still raise the Fed’s short-term rate to 3.25% to 3.5% by year’s end — the highest point since 2008.