Raising the benchmark overnight lending rate to a range of 2.25%-2.5%, the moves in June and July represent the tightest consecutive moves since the Fed began using the overnight funds rate as the main tool of monetary policy in the early 1990s. . While the Fed Funds rate more directly affects what banks charge each other for short-term loans, it feeds into a host of consumer products, including adjustable rate mortgages, auto loans and credit cards. The increase takes the funds rate to its highest level since December 2018. Markets had largely expected the move after Fed officials telegraphed the hike in a series of statements since the June meeting, and initially held gains after the announcement. Central bankers have stressed the importance of reducing inflation, even if that means slowing the economy. In its statement after the meeting, the Federal Open Market Committee on interest rate setting warned that “recent indicators of spending and output have softened.” “However, job gains have been strong in recent months and the unemployment rate has remained low,” the committee added, using language similar to its June statement. Officials again described inflation as “elevated” and attributed the situation to supply chain issues and higher food and energy prices along with “broader price pressures”. The rate hike was approved unanimously. In June, Kansas City Fed President Esther George disagreed, arguing for a slower path of half a percentage point increase. The increases come in a year that began with interest rates hovering around zero, but which has seen a commonly reported measure of inflation run at 9.1% annually. The Fed aims for inflation around 2%, although it adjusted that target in 2020 to allow it to run a little warmer in the interest of full and inclusive employment. In June, the unemployment rate held at 3.6%, close to full employment. But inflation, even by the Fed’s core personal consumption expenditure benchmark, which was 4.7% in May, is well off target. Efforts to reduce inflation are not without risks. The US economy is teetering on the brink of recession as inflation slows consumer purchases and reduces business activity. First-quarter GDP fell 1.6 percent year-on-year, and markets were bracing for a second-quarter reading on Thursday that could show successive declines, a widely used barometer for recession. The Dow Jones estimate for Thursday’s reading is for growth of 0.3%. Along with the rate hikes, the Fed is reducing the size of the assets on its balance sheet by nearly $9 trillion. Starting in June, the Fed began allowing some of the proceeds from maturing bonds to retire. The balance sheet has shrunk by just $16 billion since the start of the roll-off, although the Fed set a cap of up to $47.5 billion that could potentially have been cleared. The cap will rise through the summer, eventually reaching $95 billion a month by September. The process is known in the markets as “quantitative tightening” and is another mechanism the Fed uses to influence financial conditions. Along with the accelerating balance sheet drain, markets expect the Fed to raise interest rates by at least another half percentage point in September. Traders on Wednesday afternoon gave about a 53% chance the central bank would go even further, with a third straight hike of 0.75 percentage point, or 75 basis points, in September, according to CME Group data. The FOMC does not meet in August, but officials will gather in Jackson Hole, Wyoming for the Fed’s annual retreat. Markets expect the Fed to start cutting interest rates by next summer, even though the committee’s projections released in June do not show cuts until at least 2024. Many officials said they expected to hike aggressively until September and then assess the impact the moves had on inflation. Despite the increases—a total of 1.5 percentage points between March and June—June’s consumer price index was the highest since November 1981, with the rent index at its highest level since April 1986 and the cost of dental care to set records in a data series going back to 1995. The central bank has faced critics, both for being too slow to tighten when inflation started to pick up in 2021, and for possibly going too far and triggering a more severe economic downturn. Sen. Elizabeth Warren (D-Mass.) told CNBC on Wednesday that she worries the Fed’s hikes will pose an economic risk to those at the lower end of the economic spectrum by increasing unemployment.
