Fed increases interest rates by 75 basis points to combat inflation

The Federal Open Market Committee reaffirmed its prior claim that it is “extremely attentive to inflation concerns” in a statement released in Washington, adding that it “is completely committed to returning inflation to its 2 percent motive.”

In an effort to combat rising inflation, Federal Reserve officials raised interest rates by 75 basis points for the second consecutive month. However, this aggressive tightening could have a significant negative impact on the economy.

Faced with the strongest price pressures in 40 years, policymakers increased the federal funds rate target range on Wednesday to 2.25 percent to 2.5 percent. This brings the total increase from June to July to 150 basis points.This is the highest increase since Paul Volcker’s price-fighting years in the early 1980s.

In a statement issued in Washington, the Federal Open Market Committee repeated its previous assertion that it is “very sensitive to inflation risks” and stated that it “is fully committed to returning inflation to its 2 percent objective.”

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The FOMC reaffirmed that it “anticipates that further rises in the target range will be appropriate” and that it would change its policies if dangers arise that might prevent it from achieving its objectives.

The FOMC vote, which included two new members, Boston Fed President Susan Collins and Vice Chair for Supervision Michael Barr, was unanimous. For the first time since 2013, the board has a full complement of seven governors thanks to Barr’s appointment to it earlier this month.

In order to address the choice, Chair Jerome Powell will host a press conference in Washington at 2:30 pm.

Officials are now forcibly raising interest rates to cool the economy, even though doing so runs the risk of sending the economy into recession. They have been criticized for misjudging inflation and being slow to act.

The US economy is already being impacted by higher rates. Sales have hampered in the property sector, where the consequences are especially noticeable.

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Although Fed representatives stated that they can manage a so-called “soft landing” for the economy and prevent a sharp downturn, some analysts claim it will take a recession with rising unemployment to considerably slow price increases.

On Wednesday, the FOMC highlighted that “recent indications of spending and output have weakened,” but also emphasised that “job growth have been robust in recent months, and the unemployment rate has continued to be low.”

The most recent increase in rates has brought rates very near to what Fed policymakers define as neutral, or the point at which the economy is not growing faster or slower. According to projections from mid-June, regulators expected rate hikes to total around 3.4% this year and 3.8% in 2023.

Investors are now waiting to see if the Fed stops the rate hikes at its upcoming meeting in September or if the central bank is under pressure from great price increases to keep making huge boosts.

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Pricing in interest-rate futures contracts earlier on Wednesday indicated that traders believed the most likely outcome of the FOMC meeting on September 20–21 would be a half-point increase. Rates are predicted to peak at roughly 3.4% by year’s end, then decline in the second quarter of 2023.

In June, the US consumer price index surpassed expectations and increased by 9.1% from a year earlier, setting a new four-decade high. Prior to the midterm elections, President Joe Biden and legislative Democrats face issues as a result of the price increases’ erosion of incomes and stoking of economic anger.

Short-lived optimism that the Fed might raise rates by a full percentage point this month was spurred by high inflation. However, those wagers were reduced after Fed officials expressed caution and significant readings on consumer expectations for future inflation came in better than anticipated.

International central banks are competing to halt price increases. The European Central Bank stunned the markets with its first rate increase in more than ten years and a larger-than-expected half-point move, while the Bank of Canada lifted interest rates by a full percentage point earlier this month.

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