Jerome Powell, chairman of the U.S. Federal Reserve.
Federal Reserve officials raised interest rates by 75 basis points (bps) for the second straight month, and Chair Jerome Powell said another similar move is possible in the future, while he rejected speculation that the U.S. economy is in recession.
Policymakers, facing the hottest cost pressures in 40 years, lifted the target for the federal funds rate on Wednesday to a range of 2.25 percent to 2.5 percent. That takes the cumulative increase in the past two months to 150 bps—the steepest since the price-fighting era of Paul Volcker in the early 1980s.
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"While another unusually large increase could be appropriate at our next meeting," that will depend on the data between now and then, Powell said during a press conference following a two-day policy gathering in Washington.
The Fed will slow the pace of increases at some point, Powell said. In addition, he said officials will set policy on a meeting-by-meeting basis, rather than offering explicit guidance on the size of their next rate move, as he has done recently.
Those comments sparked a rally in U.S. stocks as Powell spoke, with Treasury yields tumbling along with the dollar.
The July increase puts rates near Fed policymakers' estimates of neutral—the level that neither speeds up nor slows down the economy. Forecasts in mid-June showed officials expected to raise rates to about 3.4 percent this year and 3.8 percent in 2023. Powell said those forecasts are currently the best current guide of where the Fed is heading this year and into 2023.
What Bloomberg Economists Say…
While many are worried that the economy is verging on recession, Fed officials see the glass as half full, with the strong labor market allowing the economy to withstand rapid monetary tightening. Bloomberg Economics thinks there's little chance that the Fed will pause its rate hikes later this year, as markets currently expect.
— Anna Wong, Yelena Shulyatyeva, Andrew Husby & Eliza Winger
The Federal Open Market Committee (FOMC) "is strongly committed to returning inflation to its 2 percent objective," it said in a statement, repeating previous language that it's "highly attentive to inflation risks." The FOMC reiterated that it "anticipates that ongoing increases in the target range will be appropriate" and that it will adjust policy if risks emerge that could impede attaining its goals.
The FOMC vote, which included two new members—vice chair for supervision Michael Barr and Boston Fed President Susan Collins—was unanimous. Barr's addition to the board earlier this month gave it a full complement of seven governors for the first time since 2013.
Forceful Hikes Are Impacting Markets
Criticized for misjudging inflation and being slow to respond earlier this year, officials are now forcefully raising interest rates to cool the economy, even if that risks tipping it into recession.
Higher rates are already having an impact on the U.S. economy. The effects are particularly evident in the housing market, where sales have slowed.
While Fed officials maintain that they can manage a so-called "soft landing" for the economy and avoid a steep downturn, a number of analysts say it will take a recession with mounting unemployment to significantly slow price gains.
The FOMC noted Wednesday that "recent indicators of spending and production have softened," but also pointed out that job gains "have been robust in recent months, and the unemployment rate has remained low." Powell said that he did not believe the economy was in recession, citing a "very strong labor market" as evidence: "Demand is still strong, and the economy is still on track to continue to grow this year," he said.
Investors are now watching to see whether the Fed slows the pace of rate increases at its next meeting in September, or whether strong price gains pressure the central bank to continue with super-sized hikes.
Futures Pricing
Traders now expect a half-point rate hike as the most likely outcome of the September 20-21 FOMC meeting, according to pricing earlier today in interest-rate futures contracts. They see rates peaking around 3.4 percent by year-end, followed by cuts in the second quarter of 2023.
The U.S. consumer price index rose by 9.1 percent in June from a year earlier, topping forecasts and hitting a fresh four-decade high. The price gains are eroding earnings and sowing discontent with the economy, creating challenges for President Joe Biden and congressional Democrats ahead of the midterm elections.
High inflation had briefly fueled speculation that the Fed would lift rates by a full percentage point this month. But those bets got dialed back after Fed officials voiced wariness and key readings on consumer expectations for future inflation were better than expected.
Central banks across the globe are engaged in similar battles against surging prices. Earlier this month, the Bank of Canada hiked rates by a full percentage point and the European Central Bank (ECB) surprised with a larger-than-expected half-point move, its first increase in more than a decade.
—With assistance from Liz Capo McCormick.
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