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At the end of weeks of speculation, the Federal Open Market Committee took its benchmark fund rate to 1.5%-1.75%, the highest level since just before the Covid pandemic began in March 2020.
Stocks were volatile after the decision but then moved higher when Fed Chairman Jerome Powell spoke at a news conference after his meeting.
"Obviously, today's 75 basis point gain is an unusual increase and I don't expect moves of this scale to be common," Powell said. However, he also expects that the July meeting will see gains at 50 or 75 basis points. He said decisions would be made in "each meeting" and that the Fed would "continue to communicate our intentions as clearly as possible."
The federal funding rate has been in effect since 1991.
"We want to see progress and will respond if that doesn't happen. Powell said… Soon, we'll see some progress."
FOMC members have pointed to a much stronger path of rate hikes ahead to prevent Inflation from moving at its fastest pace since December 1981, according to a measure often cited.
The Fed's benchmark interest rate will end the year at 3.4 percent, based on the midpoint of each member's expected target range and compared to an upward revision of 1.5 percentage points from the March estimate. The commission then saw the rate rise to 3.8 percent in 2023, one percentage point higher than what was expected in March.
Cut growth outlook for 2022
Officials have also significantly cut their economic growth outlook for 2022, now predicting GDP to grow by just 1.7 percent, down from 2.8 percent in March.
Inflation forecasts calculated in terms of personal consumption spending have also risen from 4.3% to 5.2% this year, although core inflation, excluding rapidly rising food and energy costs, was also indicated at 4.3%, up just 0.2 percentage points from previous forecasts. Core PCE inflation stood at 4.9% in April, so the June 14 forecasts are expected to ease price pressures in the coming months.
The commission's statement paints a largely optimistic picture of the economy even as inflation is higher.
"Overall economic activity appears to have increased after a slowdown in the first quarter," the statement said. "Employment has grown strongly in recent months, and the unemployment rate remains low. Inflation remains high, reflecting pandemic-related supply and demand imbalances, higher energy prices and broader price pressures. ”
True, the estimates expressed through a summary of the committee's economic forecasts also show that inflation will fall sharply in 2023, falling to 2.6% and 2.7% core, expectations little changed from March.
In the long run, the committee's policy outlook is largely in line with market forecasts, which have seen a series of immediate hikes that are likely to take fund rates to around 3.8 percent, the highest level since late 2007.
The statement was approved by all FOMC members except Fed President Esther George of Kansas City, who preferred a smaller half-point gain.
Banks often use rates as a benchmark for what they charge each other for when borrowing short-term. However, it also provides directly for a multitude of consumer debt products, such as adjustable-rate mortgages, credit cards, and automated loans.
Fund ratios can also drive higher rates on savings accounts and CDs, although feeds through that often take longer.
'Strong commitment' to 2% inflation target
The Fed's move comes with inflation reaching its fastest pace in more than 40 years. Central bank officials use the fund rate to try to slow the economy — and in this case to adjust demand so that supply can catch up.
However, a statement after the meeting to remove a long-used phrase indicated that the FOMC "expects inflation to return to its 2% target and the labor market will continue to be strong again." The statement noted only that the Fed is "strongly committed" to the goal.
Policy tightening is taking place at a rate of economic growth that has slowed significantly while prices are still rising, a condition considered stagnant inflation.
First-quarter growth slowed at an annual rate of 1.5 percent, and updated estimates On June 14 from the Atlanta Fed, through the GDPNow tracker, put the second quarter sideways. Two consecutive quarters of negative growth is the thumb rule that is widely used to determine a recession.
For weeks, policymakers have insisted that a half-point increase – or 50 basis points – could help curb inflation. In recent days, however, CNBC and other media outlets have reported that the Fed already has conditions ripe for it to get over it. The approach has changed although Powell in May also insisted that a 75 basis point increase was not considered.
However, a recent series of alarming signals has triggered more drastic actions.
Inflation as measured by the consumer price index rose 8.6 percent annually in May. The University of Michigan consumer sentiment survey that hit an all-time low also included higher inflation expectations. In addition, retail sales figures released on June 14 confirmed that the most important consumer is weakening, with sales down about 0.3 percent in a month, with inflation rising 1 percent.
The job market is a strength for the economy, although May's 390,000 gain is considered the lowest since April 2021. Average hourly earnings have risen nominally, but when adjusted for inflation it has fallen by 3% in the past year.
The commission's projections released on June 14 show that the unemployment rate, currently at 3.6 percent, is likely to rise to 4.1 percent by 2024.
All of those factors have combined to further complicate Powell's hopes of a "gentle or soft" landing he expressed in May. Past cycles of tightening interest rates often lead to recessions.
