The Federal Reserve raised interest rates by 0.75 points for the second month in a row

The Federal Reserve raised its benchmark rate by 0.75 percentage points for the second month in a row on Wednesday as it doubled down on its aggressive approach to taming rising inflation despite early signs that the US economy was losing steam.

At the end of the two-day policy meeting, the Federal Open Market Committee raised the target range for the federal funds rate to 2.25 percent to 2.50 percent.

The decision, which was unanimously supported, extended the series of interest rate increases that began in March, and has only grown in size as the Fed’s fight to fight inflation intensifies.

The rate hike means the central bank is going through its toughest monetary tightening cycle since 1981. It follows a half-point rise in May, and a 0.75 percentage point rise last month – the first of that magnitude since 1994.

With inflation rising at its fastest pace in more than four decades, further price hikes are expected in the second half of 2022, but the pace of these increases is hotly debated.

Economists are divided over whether the Fed will implement another 0.75 percentage point rate increase at its next meeting in September or opt for a smaller half point increase.

At a news conference following the decision, Federal Reserve Chairman Jay Powell said that as the central bank continues to tighten policy “it will likely become appropriate to slow the pace of increases” while policy makers assess how higher interest rates will affect the economy and inflation.

The comments sent the market higher, with the leading S&P 500 index up 2.6 percent, and the tech-heavy Nasdaq up 4.1 percent. The two-year Treasury yield, which moves with interest rate expectations, was down 0.08 percentage point at 2.97 percent.

Ashish Shah, chief investment officer at Goldman Sachs Asset Management, said: “We are past the heyday of the hawks . . . their speed in the future will be slower.”

However, Powell said the Fed would switch to a “meetings with a meeting” approach to setting policy and that “another unusually large increase may be appropriate” at the September meeting. He added that the committee “will not hesitate” to implement a sharp increase if economic data requires it.

“Inflation remains the Fed’s number one priority and they are willing to sacrifice growth to make it happen,” said James Knightley, ING’s chief international economist.

The Fed chief warned of a period of slower growth and a weaker job market might be needed to cut high inflation, but rejected the suggestion that the United States was already in a recession.

“The United States is not currently in a recession, the reason is that there are too many areas of the economy that are doing very well,” he said, although he added that avoiding that is becoming more difficult.

The central bank changed its assessment of the economy, noting that “recent indicators of spending and production have declined,” a more pessimistic view than last month when it said “economic activity is showing[ed] to pick up.”

Powell reiterated that allowing inflation to become “entrapped” would be a worse outcome than moving too aggressively, adding: “Price stability is what keeps the entire economy working.”

The federal funds rate is expected to be around 3.5 percent this year, a level that would constrain economic activity more actively.

Central bank policymakers want to see a series of slowing monthly readings of inflation, but economists warn that may not happen for months, at least for the “core” readings that exclude volatile items such as food and energy.

In June, basic goods and services posted a worrying 0.7 percent jump, led by a sharp rise in rent and other costs related to housing and other expenses likely to remain high in the fall.

The Fed raised interest rates just a day before the release of GDP figures, which could show the second consecutive quarter of contraction in economic growth. That would meet one of the common criteria of a technical recession, but Powell on Wednesday cited other signs of economic strength – including a strong labor market – to challenge the idea.

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