Latest: Fed unleashes another big rate hike in bid to curb inflation

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As part of its most aggressive effort to rein in excessive inflation in three decades, the Federal Reserve on Wednesday hiked its benchmark interest rate by three-quarters of a percent.

Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board building in Washington, Wednesday, July 27, 2022. (AP Photo/Manuel Balce Ceneta)

For the first time since 2018, the Fed’s move will boost its benchmark interest rate, which affects a majority of consumer and commercial loans, from 2.25 percent to 2.5 percent.

At 9.1%, inflation has reached its highest level in 41 years. The central bank’s decision underscores its concerted efforts to limit price increases throughout the economy. The Fed raises borrowing rates, making it more expensive to obtain a mortgage, car loan, or other type of loan. Consumers and businesses are likely to reduce their borrowing and spending as a result, resulting in lower inflation and a cooling economy.

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At a time when growth is slowing, the Fed’s rate increases raise the possibility of a recession later this year or next.

On Wednesday, Federal Reserve Chair Jerome Powell said he doesn’t believe the US is now in a recession, and that the Fed’s recent rate rises have already had some impact on slowing the economy and potentially lowering inflationary pressures.

Stocks on Wall Street rose sharply after the Fed’s message that it may not be necessary to raise rates as aggressively as previously expected. The Dow Jones industrial average finished the day with a gain of 436.

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Consumers’ faith in the economy has been shaken by rising inflation and recession fears, but these conflicting signals are making it difficult to make sense of what’s going on. Americans’ dissatisfaction with President Joe Biden has lowered his public popularity rating and increased the possibility that the Democrats would lose control of both houses of Congress in November’s congressional elections.

The housing market, which is particularly sensitive to changes in interest rates, has been severely harmed by the Fed’s recent measures to tighten lending. Since last year, the average interest rate on a 30-year fixed mortgage has nearly quadrupled to 5.5%, and home sales have fallen.

In the face of rising prices, consumers are exhibiting symptoms of reducing their spending. Moreover, sales figures from several industry surveys point to a decline. For the time being, the central bank hopes to contain inflation without causing a recession, which many analysts believe is a real possibility.

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Powell said in his press conference that the economy is slowing, demand for employees is moderating slightly, and pay growth may have peaked, and that this is helping to cut inflation.

“Are we seeing the slowdown in economic activity that we think we need?” he inquired.. It’s possible we are, according to the evidence.

He also cited indicators showing investors’ faith in the Fed’s policies, such as the expectation that inflation will return to its 2% objective over time, as evidence of that confidence.

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Additionally, Powell reiterated a Fed official’s prediction from last month that the benchmark interest rate will rise by half a percentage point in 2023 to a range of 3.25 percent to 3.5 percent. If this prediction prevails, the Fed’s rate rises will be slowed down. If the central bank raises its benchmark rate by a half-point in September and by a quarter-point in each of its subsequent sessions in November and December, it will meet its year-end goal.

“I do think they’re going to tiptoe from here,” RBC Wealth Management’s senior portfolio strategist, Thomas Garretson, tells CNNMoney.com.

Before the Fed stops raising rates, Garretson anticipates it will boost the benchmark rate by a quarter-point in September and November. Concerns about the impact of increasing interest rates on employment have also been raised by him. Garretson speculated that despite the solid job market, “cracks” may be beginning to appear due to an increase in the number of people claiming unemployment benefits.

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Some experts believe that the economy decreased for the second quarter in a row when the government releases its estimate of gross domestic product for the April-June period on Thursday. That would be in line with a long-held belief about the start of a recession.

Economists, on the other hand, argue that this does not inevitably indicate the onset of a recession. Employers created more employment in the six months following the pandemic than they had in the preceding years combined, even though the total economy shrank. Even while wages continue to rise, many firms are still struggling to find and retain enough employees.

A weakening economy, however, places the Fed’s policymakers in a difficult position. If the economy slows, how high should they hike borrowing rates? Weaker economic growth, if it results in job losses and increases in unemployment, can cut inflation on its own.

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If inflation continues to rise above the Fed’s objective of 2 percent next year, the central bank’s dilemma might become even more critical.

When it comes to inflation, how much risk are you ready to take in order to get it back to 2% as rapidly as possible? Who is the current global top economist at Citi, Nathan Sheets, a former Federal Reserve economist? There will be a lot of challenges that they’ll have to deal with.

Bank of America economists predict a “moderate” recession by the end of the year. A recession during the next two years is predicted by Goldman Sachs experts at a 50-50 chance.

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Most economists believe that the recession will be quite light. Additionally, households have more cash on hand and smaller debt loads than they did following the 2008 housing bubble crash. The jobless rate is also around a 50-year low.

In this piece, AP Economics Writer Paul Wiseman was a contributor.

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