Federal Reserve News: Fed Fights Inflation With Another Big Rate Increase (Published 2022) (2024)

The Federal Reserve raised interest rates by three-quarters of a percentage point on Wednesday, continuing its aggressive campaign to cool rapid inflation even as the economy begins to slow.

Central bankers voted unanimously to make the unusually large interest-rate move, and the policy-setting Federal Open Market Committee signaled in its post-meeting statement that more is coming, saying that it “anticipates that ongoing increases in the target range will be appropriate.”

That’s all from us today. For more, please see Jeanna Smialek’s analysis of the Fed’s decision and what it means for inflation and the economy.

If the S&P 500 stays where it is it will be the second biggest rise for the index on the day of a Fed rate announcement this year. For each of the past four meetings where the Fed has raised rates, U.S. stocks have ended the day in the green.

And that’s a wrap! Powell concludes the Fed’s July post-meeting news conference.

“There is a tug-of-war in market expectations, between the persistently high inflation numbers and resulting rapid Fed hikes, and the increasing risk of a sharp slowdown and possible recession,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

“The overarching theme for today is better-than-feared,” said Alan McKnight, chief investment officer for Regions Bank. Mr. McKnight noted Powell’s comments that suggested it may be appropriate to slow the pace of interest rate increases in the future and that the Fed is aware that some areas of the economy are softening. “That language gave a little more optimism to market participants,” he said.

Powell's point that the risks of not acting outweigh the risks of causing some economic pain are not shared by some progressive Democrats and left-leaning economists. They warn that the rate increases go too far and risk stranding vulnerable workers in a shrinking economy. Senator Elizabeth Warren, Democrat of Massachusetts, wrote this week that the Fed’s actions risk recession and will be “largely ineffective against many of the underlying causes of this inflationary spike.” Josh Bivens, the director of research at the liberal Economic Policy Institute, echoed those warnings on Wednesday and warned “the cost of a recession would be far higher than any benefit to piling on more contractionary policy to rein in already-fading inflation.”

The U.S. dollar is down 0.75 percent today, based on an index that measures it against a basket of currencies of its major trading partners like the euro and yen. That puts the dollar on course for it biggest move lower since mid-June, which will likely to be welcomed around the world.

The life of a Fed chair is an interesting mix of data and anecdote. Powell has repeatedly stressed the former in this news conference, saying the Fed will react to incoming data as it decides on further rate cuts in the future. But he also just cited, very anecdotally, comments from businesses that they are having a little easier time finding workers, as evidence that the labor market is already cooling.

Nuanced answer on the current state of the labor market. Job growth has slowed but remains high. Filings for unemployment benefits are up, but that could be just a quirk in the data. Wage growth is slowing by one measure, but not others. The two main employment surveys are sending different messages. “Executive summary,” Powell says: “There’s some evidence that labor demand may be slowing a bit. Labor supply, not so much.”

Wonky but interesting question from the AP’s Chris Rugaber just now: What does the Fed do if the two main measures of inflation continue to diverge? The Fed formally targets the price index for personal consumption expenditures, known as PCE, and Powell reiterates policymakers think that’s the better measure. But he said they will also keep an eye on the Consumer Price Index, which has been running hotter and is more familiar to consumers. He also says he’s confident the two will come together eventually.

“We think that demand is moderating, we do. How much is it moderating? We’re not sure,” Powell says. He notes that you do see a marked slowing in the second quarter, but suggests that the Fed is trying to get a grasp on just how meaningful that is -- and what it means for policy.

“At some point, it will be appropriate to slow down,” Powell says, which is both obvious and music to markets’ ears. He says that the Fed might do another three-quarter-point increase in September, but they have not decided yet.

“Haven’t seen it, and we’ll just have to see what it says,” Powell says of tomorrow’s G.D.P. report, noting that those figures are revised significantly. “You tend to take first G.D.P. reports with a grain of salt.”

Powell acknowledges again that the Fed’s tools don’t work on a major driver of inflation: constraints in supply. While the Biden administration has been directing money toward infrastructure and manufacturing to try to help ease some of the supply chain issues, those measures take time. To deal with rapid inflation, the Fed’s only option is a fairly painful one: trying to slow demand so the supply side can catch up.

Key point from Powell just now in response to Jeanna’s question about headline versus core inflation. The Fed tends to focus on “core” inflation, which excludes volatile food and energy prices. But for consumers, headline inflation is what matters. That can, in turn, affect their expectations for future inflation, which is a major focus for the Fed right now. So policymakers can’t ignore headline price growth.

“We’re not trying to have a recession, and we don’t think we have to,” Powell reiterates. He does say that the labor market is likely to weaken somewhat. “The risk of doing too little, and leaving the economy with this entrenched inflation, it only raises the costs.”

Powell did not directly answer a question about whether he believes the United States is in a recession.

Stock investors are reacting positively to Powell’s comments, with the S&P 500 index rising almost 1 percent since he began speaking.

“We think it’s necessary to have growth slow down,” Powell says. “We actually think we need a period of growth below potential in order to create some slack, so that the supply side can catch up.”

How will the Fed decide how quickly to raise rates from here? Powell points to three basic things that policymakers will be watching:

1. Is the economy slowing, as they consider necessary. (He says there’s “some evidence” of that so far.)

2. What’s happening in the labor market?

3. Are inflationary pressures, and inflation itself, easing?

“We didn’t expect a good reading, but this one was even worse than expected,” Powell says of the June C.P.I. number, which came in at 9.1 percent.

The Fed is now at a point where rates are neither stoking nor slowing the economy, by the Fed’s estimates. Powell says that the central bank will be watching for the slowdown in economic activity that “we think we need,” labor market conditions, inflation, and whether the stance of policy is restrictive enough to bring price gains back down to the Fed’s 2 percent target.