Fed Intensifies Inflation Fight With Outsized Rate Hike

But will higher borrowing costs slow economic growth too much?

WASHINGTON, DC - JUNE 15: U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee (FOMC) at the headquarters of the Federal Reserve on June 15, 2022 in Washington, DC. Powell announced that the Federal Reserve is raising interest rates by three-quarters of a percentage point, the highest rate hike in 28 years.
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Drew Angerer/Getty Images

Inflation is the disease, and the Federal Reserve’s cure for it got harsher on Wednesday.

As many expected, the central bank raised its benchmark interest rate by 0.75 percentage points to a target range of 1.50% to 1.75%. While that’s still relatively low historically speaking (it was that low just before the pandemic in 2020,) it’s the biggest single rate hike since 1994. 

Key Takeaways

  • To fight inflation, the Federal Reserve raised its benchmark interest rate by 0.75 percentage points, its largest single rate increase since 1994. 
  • The unusually big increase is a sign of how determined the central bank is to stifle the dizzying price increases Americans are facing for many of life’s necessities. 
  • Rate hikes increase borrowing costs and risk slowing the economy to the point of recession and job losses.
  • Fed Chairman Jerome Powell said it would be worth a slight increase to the currently low unemployment rate to bring inflation back under control.

The unusually sharp increase shows how behind the Fed feels in the fight against inflation, which is now running at 8.6%, its worst annual pace since 1981. By raising borrowing costs for all kinds of consumer loans, the Fed will discourage people from buying things, and in turn restore more balance to the supply and demand mismatch that fuels the higher prices. But higher borrowing costs, especially when they’re rising as fast as they did Wednesday, can do more than just slow down the economy. They could inadvertently tip it into a recession, experts fear.

“We’re not trying to induce a recession,” Federal Reserve Chairman Jerome Powell said during a press conference. “We understand the hardship that people are experiencing from high inflation and we're determined to do what we can to get inflation back down.” 

Powell told reporters avoiding a recession was still possible, but he acknowledged it had become increasingly difficult lately The Fed’s Federal Open Market Committee is laying much of the blame for recent price increases on the Russian invasion of Ukraine and anti-Covid lockdowns in China.

Accepting a slightly higher unemployment rate would be a price worth paying to restore health to the economy, and it would be better for the job market in the long run, Powell said.

“We don't seek to put people out of work,” he said. “We never think too many people are working and fewer people need to have jobs. But we also think that you really cannot have the kind of labor market we want without price stability.”

New projections show Fed officials now expect to raise the benchmark fed funds rate more than previously planned: The median projection is now a rate of 3.4% by 2024 rather than 2.8%. They also forecast that the unemployment rate will climb to 4.1%, rather than hover at 3.5-3.6%, by 2024. (It was 3.6% in May.) 

Wednesday’s rate hike signaled that the Fed is likely willing to do what it takes to tamp down inflation, even if it hurts workers and businesses, economists said.

“This was a big and bold policy move in response to a worsening inflation situation,” Michael Gregory and Benjamin Reitzes, economists at BMO Capital Markets, wrote in a report. “The more aggressive tightening path does take its economic toll.”

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