As soaring prices strain families' wallets across the country, Fed officials moved more aggressively in an effort to combat inflation on Wednesday with a .5% interest rate hike. It's the second increase by the central bank this year.
"Inflation is much too high and we understand the hardship it is causing," said Federal Reserve Chairman Jerome Powell addressing the American people. "And we're moving expeditiously to bring it back down."
Prices have been rising at their fastest pace in 40 years – hitting 8.5% year over year in March as the U.S. comes out of the pandemic. The measurement closely monitored by the Federal Reserve shows prices were up 6.6% from a year ago, its fastest pace since 1982, but excluding food and energy, they were up 5.2% annually, a slight decrease from the year to year increase in February.
In March, the central bank announced its first interest rate hike since 2018 – but only raised it by 25 basis points amid uncertainty surrounding the war in Ukraine and supply chain constraints. Rates had been close to 0% since the start of the pandemic.
At the same time, Fed officials on Wednesday also announced it plans to begin reducing its bond portfolio starting on June 1.
The half-point hike is the first time the Fed has raised its rate by more than a quarter of a percentage point in 22 years when it raised the rate by 50 basis points in May 2000. It is also the first time the Fed has moved to raise rates at consecutive meetings since 2006.
Speaking to reporters on Wednesday, Powell said there is broad support in the committee for additional .5% increases to be on the table at the next two meetings, but those decisions will be made at the meetings. He said a .75% hike is not something the committee is "actively considering."
The central bank has signaled interest rate hikes at every meeting for the rest of the year, meaning another five hikes. Powell had previously suggested he is open to more aggressive interest rate hikes earlier as the Fed looks to move to a more neutral policy. At its March meeting, the Fed projected its median rate at 1.9% for 2022 and 2.8% next year.
The Fed's more aggressive approach comes as some economists warn the U.S. could go into a recession next year. Powell said Wednesday there is a good chance of a soft or "softish" landing. He said businesses and households are in good financial shape, and the U.S. has a strong labor market.
"The economy is strong, and it's well positioned to handle tighter monetary policy," Powell said. "I do expect this will be very challenging, it's not going to be easy, and it may well depend of course on events that are not under our control."
Raising the federal funds rate means higher borrowing costs for consumers with increased interest rates on credit cards, auto loans and home mortgages. Already, mortgage rates are up more than 2% from the beginning of the year.
"Rising interest rates mean borrowing costs more, and eventually saving will earn more," said Greg McBride, chief financial analyst for Bankrate. "This hints at the steps households should be taking to stabilize their finances – pay down debt, especially costly credit card and other variable rate debt, and boost emergency savings. Both will enable you to better weather rising interest rates, and whatever might come next economically."
Speaking earlier Wednesday to The Wall Street Journal's CEO Council Summit, Treasury Secretary Janet Yellen, who previously served as Federal Reserve chair, acknowledged inflation is too high. She said it's the Fed's key job to make sure inflation remains low and stable but would not comment on Fed policy saying, no one respects the Fed's independence more than she does.
"I'm certain that the Fed will try to… deploy its tools to achieve a soft landing where the economy can continue to grow, we avoid a recession but inflation comes down," Yellen said. "I've said before that the Fed will need to be skillful and also lucky to achieve that."
Yellen said she thinks that's possible because the medium-term inflation expectation hasn't changed, so it's different from the situation in the late 1970s and 1980s.
She also said the Biden administration is working to address rising energy prices with release of oil from the Strategic Petroleum Reserve and help with port congestion. She warned of recent COVID lockdowns in China that "threaten to prolong supply chain disruptions."
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