The capital city of the United States of America (CNN) Six months ago, a 75-basis-point Federal Reserve rate hike seemed unthinkable. Now it has happened two times in a row.
Members of the US central bank authorized a three-quarters of a percentage point increase in interest rates at their July monetary policymaking meeting on Wednesday. Members voted unanimously in favor of taking a strong stance against inflation.
After a decade of record-setting price increases, the Federal Reserve’s unprecedented intervention shows how far it is willing to push the economy in order to keep costs down for American families.
There has been a decline in recent expenditure and output indices, according to Fed officials. Even so, job creation has been strong recently, and the unemployment rate has stayed low. “Reflecting supply and demand imbalances connected to the epidemic, increased food and energy prices, and broader pricing pressures,” they stated, “inflation continues to be excessive.”
As in previous months, energy prices have risen, but this is the first time that food expenses have been included in the analysis.
A variety of emergency measures, including lowering interest rates to zero, were taken by the Fed when the pandemic first struck the United States. When people and companies were encouraged to spend because of the “easy money” policy, inflation was also fostered and contributed to today’s hyperinflation.
Since the Fed no longer needs to prop up the economy, it has begun raising interest rates in an effort to “remove the punch bowl” and slow the economy down.
The Federal Reserve’s moves will raise the overnight borrowing rate between banks to a range of between 2.25 percent and 2.50 percent, the highest level since December 2018.
On an average of 25 basis points, the Federal Reserve has shifted its benchmark interest rate during the past three decades to keep the economy from overheating. Nevertheless, the Fed’s rate hike of three times that amount was implemented last month, marking the first time the Fed has implemented a 75-basis-point increase since 1994. This is the first time that the Fed has hiked interest rates by 75 basis points in a row, in contemporary times.
Is the Federal Reserve capable of taking the punch without putting an end to the party?
Adagio or allegro, the economy’s seamless transition is in doubt and is dependent on the current status of the economy and how the Fed conducts policy from here on, according to David Kelly, chief global strategist at JPMorgan Asset Management. Kelly:
While inflation is still rising, the Federal Reserve must do a careful balancing act. Confidence in the Fed’s capacity to meet its twin mandate of price stability and maximum employment might be undermined if inflation continues to rise. Federal Reserve Chairman Jerome Powell has stated that persistent inflation is the greatest threat to the economy, rather than a recession.
During the last 11 Fed tightening cycles, only three times has the Fed been able to prevent a recession. It was lower in each of those cycles than it is today. Some market participants and analysts are concerned about this.
From here, “a soft landing feels like a long shot,” says Seema Shah, chief strategy officer of Principal Global Investors. Historically, the main components of the CPI [Consumer Price Index] are more responsive to monetary policy than food or energy prices, therefore Fed policy has no impact on those prices.
BlackRock analysts wrote in a note: “We don’t believe in a gently landing. Today’s central banks must choose between encouraging economic growth and containing inflation. Until then, we expect the Federal Reserve to continue on its current path.”
In spite of the dire June inflation report, investors were generally anticipated to see the Federal Reserve raise its benchmark interest rate by another quarter of a point. Consumer prices in the United States rose 9.1 percent year-over-year in June, according to the Bureau of Labor Statistics’ most recent data. This is an improvement above the prior measurement of 8.6 percent for the year ending in May of this year.
Many families in the United States are struggling to make ends meet: The Bureau of Economic Analysis has released new data showing that Americans are saving far less than they did a year earlier. As of May, only 5.4 percent of the nation’s disposable income was saved, down from 12.4 percent in the same month last year.
The unemployment rate, on the other hand, is at a 50-year low and has been falling steadily this year. The Federal Reserve has some room to manipulate interest rates because of the continued strength of the labor market.
On Wednesday, Federal Reserve Chairman Jerome Powell will hold a press conference at 2:30 p.m. ET.
There will be more to this story as it develops, so check back often.