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The Federal Reserve on Wednesday raised interest rates in the largest rate hike enacted since 1994. The move comes as the U.S. faces rising inflation.
Following a two-day meeting of Fed officials, the central bank hiked interest rates by 0.75 basis points. It will increase the Fed’s benchmark federal-funds rate to a range between 1.5% and 1.75%.
In a statement, the Fed pointed to factors that necessitated the rate hike, such as unemployment and surging inflation that has been driven by supply and demand imbalances. It also pointed to supply-side problems created by the Russian invasion of Ukraine and ongoing COVID-19 lockdowns in China that have disrupted global supply chains.
Inflation briefly retreated in April before surging back in May. According to the Labor Department’s Consumer Price Index, inflation jumped to 8.6% while the Producer Price Index showed a 10.6% increase last month.
Markets were bracing for a hit ahead of the Fed’s announcement. Despite hopes for the Fed to execute a “soft landing” to pat down inflation without triggering a recession, many corporate executives have said that a recession is unavoidable.
Jason Furman, former chairman of the White House Council of Economic Advisers under President Barack Obama, called the Fed’s decision a “good move” but suggested it remained “overly optimistic” that inflation will come down as much as it hopes next year.
The FOMC median forecast is still overly optimistic about inflation–I think core PCE next year more likely to be in the 3.5 to 4.0 percent range than their 2.7 percent. But they sort of average in a mini recession with their unemployment forecast.
— Jason Furman (@jasonfurman) June 15, 2022
The should and will need to keep raising rates but at this point most of it may be priced into financial conditions–and if there is a macro weakening financial conditions could loosen and if inflation persists at around 4% then the opposite.
— Jason Furman (@jasonfurman) June 15, 2022
The Fed’s moves to hike rates may be too late to prevent a recession, according to Dan North, a senior economist at Allianz Trade North America. North said the Fed has been “way behind the inflation curve” and waited too long to raise rates and end pandemic-era stimulus spending.
North said the Fed placed itself in a position where it is forced to take a more hawkish stance that fuels recessionary fears in the market.
“The Fed has made a mess for itself since it takes 3-5 quarters for changes in monetary policy to take effect — they should have started a year ago,” North said in an email to International Business Times.
“In taking that aggressive path, the Fed is likely to invert the yield curve later this year, sending off a strong signal of a recession in 2023.”
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