The Federal Reserve raised interest rates by 0.75 percentage points for the second time in a row to fight inflation

The Federal Reserve on Wednesday issued a second consecutive interest rate increase of 0.75 percentage point as it seeks to rein in hyperinflation without causing a recession.

Raising the overnight borrowing rate to a range of 2.25% to 2.5%, the moves in June and July represent the toughest consecutive moves since the Fed began using the overnight money rate as a major monetary policy tool in the early 1990s. .

While the federal funds rate directly affects what banks charge each other for short-term loans, it fuels many 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 anticipated the move after Fed officials telegraphed the increase in a slew of data since the June meeting, and initially held onto gains after the announcement. Central bankers have stressed the importance of lowering inflation even if it means a slowdown in the economy.

In its statement after the meeting, the rate-setting Federal Open Market Committee warned that “recent indicators of spending and production have declined.”

“However, job gains have been strong 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 “high” and attributed the situation to supply chain problems, rising food and energy prices along with “wider price pressures”.

The rate hike was unanimously approved. In June, Kansas City Fed President Esther George dismissed her, calling for a slower path with a half-percentage point increase.

The increases come in a year that began with interest rates floating near zero, but which has seen a commonly cited inflation measure reach 9.1% annually. The Fed is aiming for inflation of around 2%, although it has revised that target in 2020 to allow it to operate a little hotter in favor of full and inclusive employment.

In June, the unemployment rate held steady at 3.6%, close to full employment. But inflation, even by the Fed’s core PCE benchmark, which was at 4.7% in May, is far from the 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 affects business activity.

First-quarter gross domestic product fell 1.6% year-on-year, and markets were bracing for a second-quarter reading due on Thursday that could show back-to-back declines, a widely used measure of a recession. The Dow Jones estimate for Thursday’s reading is 0.3% growth.

Besides increasing interest rates, the Fed is reducing the amount of asset holdings on its balance sheet of about $9 trillion. Beginning in June, the Fed began allowing some yields from maturing bonds to roll over.

The balance sheet has only fallen by $16 billion since the beginning of the rollover, even though the Fed set a cap of $47.5 billion that would otherwise have been rescinded. The cap will rise over 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 Federal Reserve uses to influence financial conditions.

Combined with the balance sheet run-up, markets expect the Fed to raise interest rates by at least another half a percentage point in September. Traders on Wednesday afternoon were allocating about a 53% chance the central bank would go further, with a third straight increase of 0.75 percentage points, or 75 basis points, in September, according to CME Group data.

The Federal Open Market Committee does not meet in August, but officials will gather in Jackson Hole, Wyoming, for the annual Federal Reserve Retreat.

Markets expect the Fed to begin cutting rates by next summer, although the committee’s forecast released in June shows no cuts until at least 2024.

Several officials said they expect to rise strongly during September and then assess the impact of the moves on inflation. Despite the increases – totaling 1.5 percentage points between March and June – the June CPI reading was the highest since November 1981, with the rent index hitting its highest level since April 1986 and dental care costs hitting a record in a series of data going back to Back to 1995.

The central bank has faced critics, for being too slow to tighten when inflation first started accelerating in 2021, and for potentially exceeding it too far and causing an even sharper economic contraction.

Senator Elizabeth Warren (D-Mass.) told CNBC on Wednesday that she fears the Fed’s increases will pose an economic risk to those at the lower end of the economic spectrum by increasing unemployment.

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