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Jeanna Smialek
Federal Reserve Takes Swing at Inflation With Largest Rate Increase Since 1994
Federal funds rate since January 1998
The Federal Reserve took its most aggressive step yet to try to tame rapid and persistent inflation, raising interest rates by three-quarters of a percentage point on Wednesday and signaling that it is prepared to inflict economic pain to get prices under control.
The rate increase was the central bank’s biggest since 1994 and could be followed by a similarly sized move next month, suggested Jerome H. Powell, the Fed chair, underscoring just how much America’s unexpectedly stubborn price gains are unsettling Fed officials.
As central bankers drive their policy rate rapidly higher, it will make buying a home or expanding a business more expensive, restraining spending and slowing the broader economy. Officials expect growth to moderate in the coming months and years and predicted that unemployment will rise about half a percentage point to 4.1 percent by late 2024 as their policy squeezes companies and workers.
Mr. Powell acknowledged that it was becoming increasingly difficult for the Fed to slow inflation without causing a recession as outside forces, including the war in Ukraine and factory shutdowns in China, threaten to curb the supply of goods and commodities like oil. If the Fed has to quash demand to an extreme degree in an effort to bring it into line with limited supply, it could make for a slump that leaves businesses shuttered and people unemployed.
“We’re not trying to induce a recession right now, let’s be clear about that,” Mr. Powell said, explaining that the Fed still wants to reduce inflation to its 2 percent goal while keeping the labor market strong — an outcome economists call a “soft landing.”
But “those pathways have become much more challenging due to factors that are outside of our control,” he said, later adding that “the environment has become more difficult, clearly, in the last four or five months.”
The latest move set the Fed’s policy rate in a range of 1.50 percent to 1.75 percent, and more rate increases are to come. Mr. Powell signaled that the debate at the Federal Open Market Committee’s next meeting in July will be over whether to raise rates half a point or to repeat an increase of three-quarters of a point, though he added that he did “not expect moves of this size to be common.”
Officials expect interest rates to hit 3.4 percent by the end of 2022, according to economic projections they released Wednesday, which would be the highest level since 2008. They also foresee the Fed’s policy rate peaking at 3.8 percent at the end of 2023, up from 2.8 percent when projections were last released in March.
As rates rise, policymakers anticipate that growth will slow and joblessness will climb slightly, starting this year.
“What Powell and the rest of the F.O.M.C. are saying is that restoring price stability is the primary focus — if they risk a mild recession, or a bumpy soft landing, that would still be successful,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “The focus is greatly on inflation right now.”
Until late last week, investors and many economists expected the central bank to raise interest rates just half a percentage point at this week’s meeting. The Fed had lifted rates by a quarter point in March and half a point in May, and had signaled that it expected to continue that pace in June and July.
But central bankers have received a spate of bad news on inflation in recent days. The Consumer Price Index jumped 8.6 percent in May from a year earlier, the fastest increase since late 1981. The pace was brisk even after the stripping out of food and fuel prices.
While the Fed’s preferred price gauge — the Personal Consumption Expenditures measure — is climbing slightly more slowly, it remains too hot for comfort as well. And consumers are beginning to expect faster inflation in the months and years ahead, based on surveys, which is a worrying development. Economists think that expectations can be self-fulfilling, causing people to ask for wage increases and accept price jumps in ways that perpetuate high inflation.
“What we’re looking for is compelling evidence that inflationary pressures are abating, and that inflation is moving back down,” Mr. Powell said at his news conference Wednesday, noting that instead the inflation situation has worsened. “We thought that strong action was warranted.”
One Fed official, the president of the Federal Reserve Bank of Kansas City, Esther George, voted against the rate increase. Though Ms. George has historically worried about high inflation and favored higher interest rates, she would have preferred a half-point move in this instance.
Some analysts found the Fed’s economic projections and Mr. Powell’s view that a soft landing may still be possible to be optimistic in light of the more aggressive policy path the central bank has charted. Economists at Wells Fargo announced after the Fed meeting that they expected a downturn to start midway through next year.
“The Fed is becoming a bit more realistic about how difficult it is going to be to lower inflation without inflicting damage on the labor market,” said Sarah House, a senior economist at Wells Fargo. “There is that growing acknowledgment that a soft landing is increasingly difficult — I still think they’re painting a fairly rosy picture.”
Stock prices have been plummeting and bond market signals are flashing red as Wall Street traders and economists increasingly expect that the economy may tip into a recession. On Wednesday, the S&P 500 rose 1.5 percent, climbing after the release of the decision and Mr. Powell’s news conference, most likely because investors had already expected the Fed to make a large move.
The economy remains strong for now, but the Fed’s actions are beginning to have a real-world impact: Mortgage rates have risen sharply and are helping to cool the housing market; demand for consumer goods is showing signs of beginning to slow as borrowing becomes more expensive; and job growth, while robust, has begun to moderate.
While the economic path ahead may be a rocky one, the Fed’s policymakers contend that things would be worse in the long run if they did not act. As prices surge, worker pay is not keeping up. That means that families are falling behind as they try to afford gas, food and rent, even in a very strong labor market.
“You really cannot have the kind of labor market we want without price stability,” Mr. Powell said Wednesday, explaining that what officials want is a job market with lots of job opportunities and rising wages. “It’s not going to happen with the levels of inflation we have.”
The White House has been emphasizing that the Fed plays the key role in bringing down inflation, even as the Biden administration does what it can to reduce some costs for beleaguered consumers and urges companies to improve gas supply.
“The Federal Reserve has a primary responsibility to control inflation,” President Biden wrote in a recent opinion column. He added that “past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do this.”
June 15, 2022, 4:39 p.m. ET
Tara Siegel Bernard
Tara Siegel Bernard, based in New York, covers personal finance for The Times.
What the Fed’s rate increase means for credit cards, car loans and student loans.
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The Fed’s decision to raise its key interest rate by three-quarters of a percentage point is good news for savers, but less so for borrowers: They can expect to pay more on credit card debt, car loans and certain student loans. [Here’s what the Fed’s decision means for mortgages.]
Credit Cards
Credit card rates are closely linked to the Fed’s actions, so consumers with revolving debt can expect to see those rates rise, usually within one or two billing cycles. The average credit card rate was recently 16.73 percent, according to Bankrate.com, up from 16.34 percent in March.
“With the frequency of Federal Reserve rate hikes this year, it will be a drumbeat of higher rates for cardholders every couple of statement cycles,” said Greg McBride, chief financial analyst at Bankrate.com. “And the cumulative effect is growing. If the Fed raises rates by a total of three percentage points this year, your credit card rate will be three percentage points higher by the first of the year.”
Car Loans
Car loans are also expected to climb, but those increases continue to be overshadowed by the rising cost of buying a vehicle (and the pain of what you’ll pay at the gas pump). Car loans tend to track the five-year Treasury, which is influenced by the federal funds rate — but that’s not the only factor that determines how much you’ll pay.
A borrower’s credit history, the type of vehicle, loan term and down payment are all baked into that rate calculation.
The average interest rate on new-car loans was 5.08 percent in May, according to Dealertrack, which provides business software to dealerships. That’s almost a full percentage point higher than December 2021, when rates had reached their lowest point since 2015 and when the firm began tracking rates.
The average rate for used vehicles was 8.46 percent in May, also nearly a full percentage point higher than December. But those rates vary widely; borrowers with the lowest credit scores received average rates of 20 percent in May, Dealertrack said, whereas individuals with the most pristine credit histories received rates of 3.92 percent.
Student Loans
Whether the rate increase will affect your student loan payments depends on the type of loan you have.
Current federal student loan borrowers — whose payments are on pause through August — aren’t affected because those loans carry a fixed rate set by the government.
But new batches of federal loans are priced each July, based on the 10-year Treasury bond auction in May. Rates on those loans have already jumped: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2023) will pay 4.99 percent, up from 3.73 percent for loans disbursed the year-earlier period.
Private student loan borrowers should also expect to pay more; both fixed and variable-rate loans are linked to benchmarks that track the federal funds rate. Those increases usually show up within a month.
But the Fed is not finished and has penciled in rates hitting 3.4 percent by the end of 2022. Private lenders will probably bake those and other expectations into their interest rates as well — meaning borrowers could end up paying anywhere from 1.5 to 1.9 percentage points more, depending on the length of the loan term, explained Mark Kantrowitz, a student loan expert and author of “How to Appeal for More College Financial Aid.”
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June 15, 2022, 4:34 p.m. ET
Tara Siegel Bernard
Tara Siegel Bernard, based in New York, covers personal finance for The Times.
What the Fed’s rate increase means for mortgages.
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What does the Fed’s decision to raise its key interest rate by three-quarters of a percentage point mean for mortgages? [Here’s what the Fed’s decision means for credit cards, car loans and student loans.]
Rates on 30-year fixed mortgages don’t move in tandem with the Fed’s benchmark rate, but instead track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations around inflation, the Fed’s actions and how investors react to all of it.
“We are seeing rates move up pretty briskly and a lot of that has to do with forward-looking expectations with where things are headed,” said Len Kiefer, deputy chief economist at Freddie Mac. “Maybe inflation will be stickier than the market thought.”
Mortgage rates have jumped by two percentage points since the start of 2022, though they’ve held somewhat steady in recent months. But with consumer prices still surging, mortgage rates are on the rise once again — by some estimates, reaching as high as 6 percent.
The closely watched rate averages from Freddie Mac won’t be released until Thursday, but they already began to tick a bit higher last week: Rates on 30-year fixed rate mortgages were 5.23 percent as of June 9, according to Freddie Mac’s primary mortgage survey, up from 5.09 percent the week before and 2.96 percent the same week in 2021.
Other home loans are more closely tethered to the Fed’s move. Home equity lines of credit and adjustable-rate mortgages — which each carry variable interest rates — generally rise within two billing cycles after a change in the federal funds rates.
June 15, 2022, 4:00 p.m. ET
Jason Karaian
The S&P 500 closed the day up 1.4 percent, rallying from a more modest rise before the Fed made its big announcement.
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June 15, 2022, 3:47 p.m. ET
Jim Tankersley
The White House press secretary, Karine Jean-Pierre, just dodged a question in a news briefing about whether higher unemployment, as forecast today by the Fed, would be acceptable to bring down inflation. Instead, she talked about the unemployment rate falling after President Biden took office and said she expected job gains to continue at a pace that would be consistent with the current rate of 3.6 percent.
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June 15, 2022, 3:38 p.m. ET
Ben Casselman
Wells Fargo economists, in a note sent to clients moments after the Fed press conference ended, say a recession in 2023 “now seems more likely than not.”
June 15, 2022, 3:29 p.m. ET
Jason Karaian
At the end of the news conference, the S&P 500 is up more than 2 percent, rallying from a dip after the Fed announced its supersize rate increase.
June 15, 2022, 3:37 p.m. ET
Jason Karaian
And for those keeping score, the index is now within a whisker of regaining the level it fell below on Monday, confirming that it was in a bear market (a 20 percent fall from its January peak).
June 15, 2022, 3:43 p.m. ET
Isabella Simonetti
Speaking of stocks, “it is possible that markets find their footing after the recent few days of severe volatility,” said Seema Shah, the chief global strategist at Principal Global Investors. “However, once the data starts to roll over with greater speed, renewed equity market declines are likely while credit markets are almost certain to face greater pain.”
June 15, 2022, 3:28 p.m. ET
Jeanna Smialek
And that’s a wrap! A few of the big takeaways from those remarks...
June 15, 2022, 3:31 p.m. ET
Jeanna Smialek
The Fed is trying to achieve a soft landing, slowing inflation without tanking the economy, but doing so is more difficult as rapid inflation lasts.
June 15, 2022, 3:32 p.m. ET
Jeanna Smialek
Central bankers are nervously watching not just inflation for moderation, but also inflation expectations to make sure they stay under control.
June 15, 2022, 3:32 p.m. ET
Jeanna Smialek
Fed officials expect to make either a half point or three-quarter point increase at their next meeting.
June 15, 2022, 3:33 p.m. ET
Jeanna Smialek
The strategy right now is getting rates up to a point where they are restraining the economy this year.
June 15, 2022, 3:27 p.m. ET
Ben Casselman
Powell notes that inflation is high around the world, but that the U.S. has had both more inflation and a stronger economic recovery. Many economists have argued that dynamic is the result of the trillions of dollars of government aid the United States provided during the pandemic -- although Powell himself didn’t make that connection today.
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June 15, 2022, 3:27 p.m. ET
Deborah Solomon
Powell offered some advice for first-time homebuyers: Wait it out for supply and demand to rebalance.
June 15, 2022, 3:26 p.m. ET
Ben Casselman
Fed chairs always emphasize that the central bank’s policies are “data-dependent” and can change in response to shifts in the economy. But Powell today has really stressed the amount of uncertainty right now. That’s in part because there are so many exogenous factors. But it’s also because of the reality that policymakers -- like pretty much all forecasters -- have repeatedly been wrong about how high inflation would go and how long it would last.
June 15, 2022, 3:23 p.m. ET
Jeanna Smialek
This press conference sends a clear message: The Fed is determined to bring inflation down, but it may not be able to do that without causing a recession as shock after shock hits the supply side of the economy. The Fed can only work on demand.
June 15, 2022, 3:21 p.m. ET
Jeanna Smialek
Powell is making clear at this meeting that a lot of what's causing inflation is out of the Fed's control, which could complicate plans for a soft landing. As to whether it's still possible for the Fed to engineer one, Powell says "there’s a much bigger chance now that it will depend on factors we don’t control." Jumps in commodity prices, like gas and food, could “take the decision out of our hands.”
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June 15, 2022, 3:18 p.m. ET
Jeanna Smialek
Powell talks about the growing breadth of inflation, which makes officials more worried that rapid price increases will become a more permanent feature of the economy. Goods initially jumped in price, but now it’s also services. “If you’ve flown on a plane lately, planes are very full,” he says, and fares are expensive. “Shelter inflation is very expensive.”
“It’s a time when we’re not seeing progress -- and we want to see progress.”
June 15, 2022, 3:16 p.m. ET
Ben Casselman
Powell is asked about how the Fed is looking at "headline" versus "core" inflation. This is a tricky issue: Officially, the Fed’s target of 2 percent inflation over time refers to overall inflation, as measured by the Personal Consumption Expenditures price index. But because food and energy prices are so volatile, policymakers see core inflation, which strips out those categories, as a better measure of the underlying pace of inflation. Right now, though, the Fed is very worried about consumers’ expectations for future price increases — and consumers don’t think about “core” inflation.
June 15, 2022, 3:15 p.m. ET
Ben Casselman
Powell with the understatement of the day: “Clearly people don’t like inflation, a lot.”
June 15, 2022, 3:15 p.m. ET
Jeanna Smialek
Powell acknowledges that “it will take some time to get inflation back down — but we will do that.”
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June 15, 2022, 3:14 p.m. ET
Deborah Solomon
Powell says the "worst mistake" the Fed could make is failing to achieve price stability and notes that "we can't."
June 15, 2022, 3:12 p.m. ET
Jeanna Smialek
“The role that we can play is around demand,” Powell says. He adds that wages are not “principally” responsible for the inflation we’re seeing, but that in the future they might be very important. “There’s always a risk of going too far or going not far enough. It’s going to be a difficult judgment to make, or maybe not, maybe it will be quite clear.”
June 15, 2022, 3:09 p.m. ET
Ben Casselman
Powell clearly doesn’t buy the idea that the economy is already slowing, despite the weak retail sales report this morning. He says there are shifts in how people are spending, but that overall spending is still strong.
June 15, 2022, 3:08 p.m. ET
Jeanna Smialek
Powell continues to stress that he sees a strong economy that is able to weather higher interest rates. He notes that overall, spending is very strong. “There’s no sign of a broader slowdown, that I can see, in the economy,” he says. “We see job growth slowing, but it’s still at quite robust levels.”
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June 15, 2022, 3:05 p.m. ET
Ben Casselman
The Fed wants to cool off the labor market, but it doesn’t want to see a big increase in unemployment. That is, to say the least, a tricky dance, and one many economists are skeptical that the Fed can achieve. But Powell argues it is possible because of the unusual nature of the late-pandemic job market.
June 15, 2022, 3:05 p.m. ET
Ben Casselman
Specifically, Powell points to the fact that there are nearly two open jobs for every one unemployed worker. In theory, that means that the number of openings could fall without people needing to lose their jobs. That would still have an effect on workers, who would have less leverage to demand raises. But it wouldn’t cause the pain of widespread unemployment.
June 15, 2022, 3:05 p.m. ET
Ben Casselman
“We never seek to put people out of work,” Powell says. But, he adds, “You really cannot have the kind of labor market we want without price stability.”
June 15, 2022, 3:04 p.m. ET
Jeanna Smialek
Powell notes that the Fed deleted a sentence that had suggested that monetary policy alone could bring down inflation with a strong labor market. Given so many outside factors — war in Ukraine, lockdowns in China — that didn’t seem right anymore.
June 15, 2022, 3:06 p.m. ET
Jeanna Smialek
“You look around the world, lots of countries are looking at inflation of 10 percent,” Powell notes, explaining that the fallout from Ukraine is pushing commodity costs up. Headline inflation matters because it helps to elevate household inflation expectations, so it matters. “The environment has become more difficult, clearly.”
June 15, 2022, 3:04 p.m. ET
Jim Tankersley
Powell notes that the Fed will be cautious when assessing any signs of progress in bringing down the inflation rate in the months to come. “We’re going to be careful about declaring victory” over inflation, he says, noting that the rate declined last summer before surging again in the fall
June 15, 2022, 3:02 p.m. ET
Jeanna Smialek
“We’re not trying to induce a recession now, let’s be clear about that,” Powell says.
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