The Federal Reserve hiked its benchmark federal funds rate by a quarter of a percentage point on Wednesday after skipping the previous hike, bringing the rate to the highest level since 2001.
The rate hike brings the Fed’s target rate within a range of 5.25% and 5.50%, making this the eleventh hike since March 2022, after temporarily pausing the rate increases in June. Most economists anticipated a quarter-point interest rate hike as a part of the ongoing effort to bring inflation down, bringing the high end of the range to the highest rate since January 2001, according to the Federal Reserve Bank of St. Louis.
“The Committee decided to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent,” the Federal Reserve press release said. “The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.”
“I suspect the Fed will raise rates a quarter of a point at the upcoming FOMC meeting and then wait a few months to see any lagged effects come in,” Peter Earle, economist at the American Institute for Economic Research (AIER), told the Daily Caller News Foundation. “If disinflation continues at its current pace, with this rate hike we may be at the top of this cycle. If disinflation slows or the prices of certain goods/services prove sticky—like rents/shelter costs—we could see another 25 basis point hike in the late summer/early fall.”
The increase comes as inflation remains high. The Consumer Price Index (CPI), a broad measure of prices of everyday goods such as energy and food, increased 3.0% year-over-year for the month of June, which is down from 4.0% for May but still far from the Fed’s 2% target.
Core CPI, which excludes energy and food, rose 4.8% on an annual basis in June compared to 5.3% in May.
“Inflation is now falling faster than Fed officials expected, which may put them in danger of overtightening and creating a recession if they continue raising interest rates as planned,” Dr. Thomas Hogan, senior research faculty at the AIER, told the DCNF.
According to the CME Group, as of Wednesday morning, markets were predicting more than 96% odds that the Fed would raise the federal funds rate by 25 basis points.
“When Silicon Valley Bank and a handful of other regional banks failed in the spring, many thought that, inflation or no inflation, the FOMC would quickly shift to an expansionary policy bias,” Earle told the DCNF. “They didn’t. The next test for the Fed will come if the softness currency seen in the US economy becomes a recession. If that happens and inflation isn’t back down to 2 percent, will stable prices or macroprudential concerns take precedence in their policy setting? That’s the question.”
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