The Federal Reserve announced Wednesday that it would hike interest rates by 0.75% — the boldest action since 1994.
The central bank already increased rates by 0.5% in May — the largest such increase since 2000 — after a 0.25% rate hike from near-zero levels in March. While the Consumer Price Index (CPI) increased 8.6% year-over-year as of May, the Producer Price Index (PPI) — which monitors inflation for wholesalers — increased 10.8% over the same period, according to two recent reports from the U.S. Bureau of Labor Statistics.
“Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low,” the Federal Open Market Committee, which handles the central bank’s monetary policy interventions, said in a statement. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
Policymakers pointed to the Russian invasion of Ukraine and COVID-19 lockdowns in China as factors placing upward pressure on prices, and therefore interfering with the Fed’s long-term target of 2% inflation rates.
Rate hikes are meant to discourage inflation, but they carry the unfortunate side effect of increasing borrowing costs and thereby dampening economic activity.
The most recent move will place the Fed’s benchmark interest rate between 1.5% and 1.75%. Every member of the Federal Open Market Committee, including Fed Chair Jerome Powell, voted in favor of the 0.75% rate hike — with the exception of Federal Reserve Bank of Kansas City President Esther George, who opted for another 0.5% rate hike.
The decision to raise interest rates at the fastest increment in nearly 30 years occurs as several voices on Wall Street call for aggressive Fed action to battle rising price levels. However, policymakers affirmed that they would continue monitoring present economic conditions when deciding on more rate hikes.
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the Federal Open Market Committee statement added. “The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
At the end of last month, President Joe Biden met with Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen in an effort to show that he is serious about rising price levels. Past commanders-in-chief — including Richard Nixon, Ronald Reagan, and George H.W. Bush — have called for central bankers to avoid rate increases in fears of slowing economic growth. Most recently, Donald Trump pressured Powell to slash rates as the economy began to free-fall amid the spread of COVID-19. Biden’s approach represents a departure from his predecessors as high prices weigh on American consumers ahead of the midterm elections.
Biden wrote about rising price levels in a recent opinion piece for The Wall Street Journal. While saying that he would not “meddle with the Fed,” Biden vowed to make high prices his “top economic priority” while arguing that the central bank still “has a primary responsibility to control inflation.”
“Americans are anxious. I know that feeling. I grew up in a family where it mattered when the price of gas or groceries rose,” Biden said. “We felt it around the kitchen table. But the American people should have confidence that our economy faces these challenges from a position of strength.”
Source: Dailywire
