The Federal Reserve is set to raise interest rates by 0.75 percentage points for the second time in a row on Wednesday, as it doubles down on its aggressive approach to taming heightened inflation despite early signs the economy is beginning to cool.
At the end of its two-day policy meeting, the Federal Open Market Committee is expected to lift its benchmark policy rate to a new target range of 2.25 per cent to 2.50 per cent, in line with officials’ estimates of the long-run “neutral” rate. When inflation is running at 2 per cent, this policy setting is considered to neither stimulate nor restrict growth.
The decision, due at 2pm Eastern Time, extends a string of interest rate increases that began in March and have ratcheted up in size as the Fed’s battle to fight inflation has intensified. Following a half-point rate rise in May and the first 0.75 percentage point rise since 1994 last month, Wednesday’s adjustment is set to make this tightening cycle the most aggressive since 1981.
With inflation running at its fastest pace in more than four decades, the central bank is poised to continue raising interest rates well into the second half of 2022, with economists split as to whether the Fed will raise rates by another 0.75 percentage points in September or downshift to a half-point adjustment.
Having established its “unconditional commitment” to restoring price stability, the Fed is expected to look past any early indications that the economy is beginning to slow at least for now. It has also said that failing to get inflation under control and allowing it to become “entrenched” would be a worse outcome than moving too aggressively.
The federal funds rate is projected to reach about 3.5 per cent this year, a level that will more actively constrain economic activity.
Most officials believe policy must become “restrictive” in order to damp demand sufficiently to contain consumer price growth.
They have also signalled that there needs to be “clear and convincing” evidence that inflation is beginning to slow before the Fed will ease up on its efforts to tighten monetary policy. More specifically, the central bank is looking for a string of decelerating monthly prints — something economists warn may not happen for months, at least in terms of “core” readings, which strip out volatile items such as food and energy.
In June, this category of goods and services recorded an alarming 0.7 per cent jump, led by a sharp uptick in shelter-related expenses and other costs that are likely to remain elevated into the autumn.
The Fed is set to meet just one day before the release of the latest gross domestic product figures, which may show a second straight quarter of contracting economic growth in the US. That would meet one of the common criteria for a recession, but officials point to other signs of strength — including the robust labour market — challenging that view.
Conflicting economic data points will make the Fed’s job much more difficult as it plots out subsequent policy actions, and raise the pressure to slow down the pace of rate rises soon.
Officials still maintain inflation can be brought back down to the Fed’s 2 per cent target without excessive job losses, although they have acknowledged the path to achieve that outcome has become more narrow.
Source: Economy - ft.com
