August 15, 2022

The Fed raises interest rates again, says it will not relent in the fight against inflation

The Fed raises interest rates again, says it will not relent in the fight against inflation

  • The Federal Reserve raised interest rates to a range of 2.25% -2.50%
  • US central bank points to weak economic data
  • Fed Powell speaks at 2:30 PM ET (1830 GMT).

WASHINGTON, July 27 (Reuters) – The U.S. Federal Reserve raised its benchmark interest rate overnight Wednesday by three-quarters of a percentage point in an effort to quell the biggest breakout in inflation since the 1980s, U.S. Federal Reserve President Jerome Powell said. Another “extraordinarily large” rally may be appropriate in September if price pressures do not subside sufficiently.

“Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising food and energy prices, and broader price pressures,” the Federal Open Market Committee said, as it raised the policy rate to a range of 2.25% to 2.50%.

The FOMC added that it remains “extremely cautious” about inflation risks. Powell emphasized this point at a news conference after the unanimous policy decision was passed, saying it was “essential” to bring down inflation.

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Powell said Fed officials are “fully aware” of the hardships that inflation poses to American households, especially those with limited resources, and will not relent until “conclusive evidence” is presented that inflation is declining.

Inflation has risen this year to its highest level in four decades, and when measured by the Federal Reserve’s preferred metric, it’s more than three times the central bank’s 2% target.

Reuters Graphics Reuters

“Restoring price stability is just something we have to do,” Powell said. “There is no option to fail to do so.”

While job gains remained “strong,” officials noted in the new policy statement that “recent indicators of spending and production have eased,” a reference to the fact that the large interest rate increases they’ve imposed since March are starting to pay off.

However, Powell insisted that the economy has fundamental strength.

“I don’t think the United States is currently in a recession,” he said, noting an unemployment rate still close to a half-century low and strong wage growth and job gains. “It doesn’t make sense for the United States to be in a recession.”

But lowering inflation to the Fed’s target “is likely to involve a period of below-trend economic growth, and some easing of labor market conditions, but these outcomes are likely to be necessary to restore price stability and pave the way for maximum employment and stable prices.” The long-term “.

data-driven

With a 75 basis point rise last month and smaller moves in May and March, the Fed raised its policy rate by a total of 225 basis points this year as it struggles to break through 1980s-level inflation with its 1980s-style monetary policy.

The rate of policy is now at a level that most Fed officials feel has a neutral economic impact, in effect marking the end of pandemic-era efforts to encourage spending by households and businesses with cheap money. The rate also coincides with the highest point in the central bank’s previous tightening cycle from late 2015 to late 2018, a level reached this time in just a four-month period.

The latest policy statement gave little clear guidance on what steps the Fed might take next, a decision that will depend heavily on whether upcoming data shows inflation is starting to slow.

With the latest data showing consumer prices rising more than 9% at an annual rate, investors expect the US central bank to raise its policy rate by at least half a percentage point at its September 20-21 meeting.

“While another unusually large increase may be appropriate at our next meeting, this is a decision that will depend on the data we get every now and then,” Powell said. “We will continue to make our decisions by meeting, and spreading our thinking as clearly as possible.”

Futures markets tied to the Fed’s policy outlook have tilted somewhat toward a more moderate increase for the next meeting where Powell spoke.

In the US Treasury market, which plays a major role in transmitting Fed policy decisions to the real economy, yields on two-year bonds that are more sensitive to policy expectations moved lower. The yield on the 10-year bond was little changed.

Stocks on Wall Street added to broad gains in the session, with the S&P 500 Index (.SPX) To close up 2.6%, while the dollar closed (DXY.) Weakened against a basket of currencies of major trading partners.

From here, the Fed is likely to slow its hawkish pace, reassuring of potential inflation peaks and waning inflation expectations with lower oil prices,” Seema Shah, chief global strategist at Principal Global Investors, said in a note. “However, with the labor market picture continuing to be robust, wage growth remains uncomfortably high and core inflation is expected to decline at a very slow pace, the Fed certainly cannot stop tightening, and it cannot lower gears too much.”

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(Reporting by Howard Schneider and Ann Sphere); Editing by Dan Burns and Paul Simao

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