The US Federal Reserve on Wednesday again raised the benchmark interest rate by three-quarters of a percentage point in its ongoing battle to tamp down raging price pressures that are squeezing American families.
It was the second straight 75 basis point increase, and the fourth rate hike this year, as US central bankers move aggressively to cool the strongest surge in inflation in more than four decades, without derailing the world’s largest economy.
While the Fed noted signs that the US economy is slowing, it signaled plans to continue to increase borrowing costs — while staving off recession.
“Inflation is much too high,” Fed Chair Jerome Powell told reporters after the Fed’s rate hike, adding that another “unusually large increase could be appropriate” at the next meeting.
President Joe Biden is facing political backlash for surging prices, which he has mainly blamed on the Russian invasion of Ukraine that has sent global food and energy prices soaring.
In a vote that was unanimous — unlike the decision made in June — the policy-setting Federal Open Market Committee raised its benchmark lending rate to a range of 2.25 to 2.5 percent, after starting the year near zero.
“Recent indicators of spending and production have softened,” the FOMC statement said.
Biden insists the US economy will avoid a recession, but even as his approval ratings have cratered, he has supported the Fed in its battle to quell inflation.
Powell and others have made it clear they are willing to risk a downturn and will keep raising interest rates until they see solid evidence that inflation is moving back towards the two percent goal.
“We’re trying to do just the right amount. We’re not trying to have a recession and we don’t think we have to,” Powell said.
“We think that there’s a path for us to be able to bring inflation down while sustaining a strong labor market.”
On Wall Street, all three major indices advanced during Powell’s press conference.
Economists say this has been the most aggressive Fed tightening cycle since the 1980s, when stagflation — a wage-price spiral and stagnant growth — crippled the US economy.
The challenge for policymakers is to quell inflation before it becomes dangerously entrenched without sending the world’s largest economy into a recession that would reverberate around the globe.
– Recession risk –
Policymakers seemed to acknowledge that some factors are beyond their control.
“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity,” the FOMC statement said.
While prices have continued to rise, with home prices hitting a new record, rising mortgage rates have slowed housing sales for five straight months.
But global oil prices are trending down, with the US benchmark WTI falling below $95 a barrel from a peak of more than $123 a barrel in March, and gasoline prices at the pump have fallen more than 70 cents from the record of just over $5 a gallon in mid-June.
Meanwhile, the job market has remained strong, and surveys show inflation expectations in the months ahead have started to trend lower.
Policymakers want to engineer a “soft landing,” taming inflation without causing a downturn, but economists warn they face an increasingly narrow path to success and it would be easy to overshoot by being too aggressive.
GDP in the first quarter contracted 1.6 percent, and the first reading on the April-June period is due out Thursday.
Though the consensus forecast calls for modest growth, many economists expect a downturn.
Two quarters of negative growth are generally considered a sign the economy is in recession, although that is not the official criteria.
“The Fed is now stuck between a rock and a hard place, with no easy way out without the economy feeling pain,” KPMG chief economist Diane Swonk said in an analysis, noting that “Powell has started to underscore that reality by admitting a recession could occur.”
“Brace yourself,” Swonk said on Twitter, likening the surge in inflation to a cancer that will spread if left untreated.
She said the benchmark interest rate likely will have to rise to a range of 3.75-4.0 percent, which would mean another 150 basis points of increase in coming months.
Kansas City Fed President Esther George dissented at the June meeting, warning that moving too fast could be “unsettling” and raise recession fears, but voted for the big rate hike this time.