The Federal Reserve took an aggressive step on Wednesday to combat soaring inflation with the announcement of another larger than usual, three-quarters of a percentage point interest rate hike. The increase comes as central banking officials face a tough balancing act: bringing down rising prices amid growing concerns of an economic downturn.
The latest increase brings the federal funds rate to between 2.25% and 2.50%, which is where it was at its most recent high in summer 2019 before the coronavirus pandemic.
This marks the fourth interest rate hike of the year as consumer prices have risen at the fastest pace in more than 40 years. Five months ago, the federal funds rate was near zero percent. At its June meeting, the Federal Open Market Committee raised the federal funds rate by a more aggressive 75 basis points for the first time in nearly 30 years following an increase of 25 basis points and 50 basis points at the March and May meetings, respectively.
With consumer prices up more than 9% from a year ago, additional rate increases are expected through the end of the year. At their meeting last month, Fed officials projected the rate would increase to more than 3% by 2023. The committee will meet again in September, November and December.
The Federal Reserve signaled it does anticipate additional rate hikes. Federal Reserve Chairman Jerome Powell said Wednesday that another "unusually large" rate increase at the next meeting could be "appropriate," but the committee is making that decision meeting by meeting, and it would be likely then for increases to slow. Powell acknowledged the possibility of further hikes next year.
Increases in the federal funds rate has led to higher borrowing costs for Americans. According to Greg McBride, chief financial analyst at Bankrate.com, debts with variable rates such as credit cards and home equity lines of credit will be affected the most.
"Consumers should look to low-rate credit card balance transfer offers and doing so with urgency to insulate from further rate increases and make headway on paying down debt," McBride said. "Ask your lender if fixing the interest rate on your outstanding home equity balance is an option."
The federal funds rate hike comes as several other key pieces of economic data are scheduled to be released this week. On Thursday, the Commerce Department will release its report on GDP for the second quarter of 2022, which could further show signs that the U.S. is in a recession after the measure of economic activity declined in the first quarter of the year.
On Monday, President Biden said during an event that the U.S. is not going to be in a recession, noting the unemployment rate is near its pre-pandemic level at 3.6%. Over the weekend, Treasury Secretary Janet Yellen, who also previously served as chair of the Federal Reserve, acknowledged in an interview that the economy is slowing down but said it is not an economy in recession. Whether the U.S. is in a recession is determined by the National Bureau of Economic Research. Yellen argues the economy is in a period of transition.
"I do not think that the U.S. is currently in a recession," Powell said. He noted there are many areas of the economy performing "too well." Powell specifically mentioned the labor market, saying that job growth is slowing but that is expected. "This is a very strong labor market."
The Commerce Department will also release its latest report on the Personal Consumption Expenditures Price Index for June on Friday, the preferred inflation gauge used by the Federal Reserve.