As widely expected, the Federal Reserve gave a second unusually large increase to its benchmark fed funds rate Wednesday as part of its ongoing campaign to bring rampant inflation under control. The three-quarters of a percentage point hike—triple what the Fed usually does when it raises interest rates—will boost the fed funds rate to a range of to 2.25% to 2.5%. Prior to the previous rate increase in June, the Fed hadn’t raised rates by this much since 1994. The fed funds rate directly and indirectly affects borrowing costs on many kinds of loans, including interest rates on credit cards and car loans. Wednesday’s hike restores the Fed’s rate to levels seen in early 2019, before some minor economic setbacks followed by the pandemic forced the Fed to lower interest rates to near-zero in an effort to encourage spending and support the economy. The Fed’s current campaign of rate hikes, which started in March, is designed to do the opposite: discourage spending and slow the economy so that supply and demand can rebalance, and restrain runaway price increases. The strategy, however, risks dragging the economy down so much that a recession and mass layoffs ensue. “The current picture is plain to see,” Federal Reserve chair Jerome Powell said in a press conference. “The labor market is extremely tight, and inflation is much too high. Against this backdrop. Today, the FOMC raised its policy interest rate by three quarters of a percentage point and anticipates that ongoing increases in the target range for the federal funds rate will be appropriate.” The Federal Open Market Committee (FOMC) is the body that sets the Fed’s policy The unusually aggressive rate hike—and the promise of more to come— signaled the Fed’s determination to bring inflation under control despite the risks to economic growth, economists said.“The Fed has decided that in the battle against inflation, it will shoot first and ask questions later,” Avery Shenfeld, chief economist of CIBC World Markets, said in a commentary. Powell acknowledged the Fed’s actions are likely to slow the economy and hurt the labor market, but said those outcomes were necessary to control inflation. How well the economy can stomach the Fed’s inflation-fighting medicine remains to be seen. U.S. Gross Domestic Product—a broad measure of overall activity—is likely to be shown to have shrunk a second quarter in a row when new data is released Thursday, according to a tracker published by the Federal Reserve Bank of Atlanta. That would signal a weakening economy and an increased risk of recession.However, the FOMC, pointed to the strong job market as evidence that the economy can withstand the rate hikes. Employers added 372,000 jobs in June, more than forecasters had expected. Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
