The Federal Reserve on Wednesday enacted its second consecutive 0.75 percentage point interest rate increase as it seeks to tamp down runaway inflation without creating a recession.
The Federal Reserve on Wednesday enacted its second consecutive 0.75 percentage point interest rate increase, taking its benchmark rate to a range of 2.25%-2.5%.
Chair Jerome Powell said there will be a point where the Fed starts to slow hikes to assess their impact.
“We actually think we need a period of growth below potential in order to create some slack,” he said.
In taking the benchmark overnight borrowing rate up to a range of 2.25%-2.5%, the moves in June and July represent the most stringent consecutive action since the Fed began using the overnight funds rate as the principal tool of monetary policy in the early 1990s.
While the fed funds rate most directly impacts what banks charge each other for short-term loans, it feeds into a multitude of consumer products such as adjustable mortgages, auto loans and credit cards. The increase takes the funds rate to its highest level since December 2018.
Markets largely expected the move after Fed officials telegraphed the increase in a series of statements since the June meeting. Stocks hit their highs after Fed Chair Jerome Powell left the door open about its next move at the September meeting, saying it would depend on the data. Central bankers have emphasized the importance of bringing down inflation even if it means slowing the economy.
“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said.
In its post-meeting statement, the rate-setting Federal Open Market Committee cautioned that “recent indicators of spending and production have softened.”
“Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low,” the committee added, using language similar to the June statement. Officials again described inflation as “elevated” and ascribed the situation to supply chain issues and higher prices for food and energy along with “broader price pressures.”
Powell said he does not think the economy is in recession, though growth was negative in the first quarter and was expected to be barely positive in the second quarter.
“Think about what a recession is. It’s a broad-based decline across many industries that’s sustained more than a couple of months. This doesn’t seem like that now,” he said. “The real reason is the labor market has been such a strong signal of economic strength that it makes you question the GDP data.”
The rate hike was approved unanimously. In June, Kansas City Fed President Esther George dissented, advocating a slower course with a half percentage point increase.
The increases come in a year that began with rates floating around zero but which has seen a commonly cited inflation measure run at 9.1% annually. The Fed aims for inflation around 2%, though it adjusted that goal in 2020 to allow it to run a bit hotter in the interest of full and inclusive employment.
Powell said the Fed is “strongly committed” to reducing inflation and said that could come with a cost to general economic growth and the labor market in particular.
“We think it is necessary to have growth slow down. Growth is going to be slowing down this year for a couple of reasons,” he said. The economy, he added, probably will grow below its long-run trend for a period of time. “We actually think we need a period of growth below potential in order to create some slack.”
In June, the unemployment rate held at 3.6%, close to full employment. But inflation, even by the Fed’s standard of core personal consumption expenditures, which was at 4.7% in May, is well off target.
Stuart Turley is President and CEO of Sandstone Group, a top energy data, and finance consultancy working with companies all throughout the energy value chain. Sandstone helps both small and large-cap energy companies to develop customized applications and manage data workflows/integration throughout the entire business. With experience in implementing enterprise networks, supercomputers, and cellular tower solutions, Sandstone has become a trusted source and advisor in this space. Stuart has led the “Total Corporate Digital Integration” platform at Sandstone and works with Sandstone clients to help integrate all aspects of modern digital business. He is also the Executive Publisher of www.energynewsbeat.com, the best source for 24/7 energy news coverage and is the Co-Host of the energy news video and Podcast Energy News Beat.
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Stuart is guided by over 30 years of business management experience, having successfully built and help sell multiple small and medium businesses while consulting for numerous Fortune 500 companies. He holds a B.A in Business Administration from Oklahoma State and an MBA from Oklahoma City University.