(CNN) — The US Federal Reserve raised interest rates again by 0.75% in its battle against time to rein in historical levels of inflation. The Fed’s decision comes just a month after, in its most aggressive move since 1994, it raised interest rates by the same percentage.
This is the first time in its recent history that the Federal Reserve has raised interest rates twice in a row by three-quarters of a percentage point, something that seemed so far-fetched just six months ago. This contrasts with what it has been his policy for the past three decades to cut or raise interest rates by 0.25%, preferring to push the economy at a slow pace. However, the extremely high inflation forced the Central Bank to take more stringent measures to curb this inflation.
Explaining the move, Powell said, “The labor market is too tight and inflation is too high.”
At the conclusion of the July policy-making meeting on Wednesday, Federal Reserve members approved the massive increase. This unprecedented measure underscores how much the Fed is willing to moderate the economy in rising costs for Americans, amid the highest price increases since the 1980s.
Moreover, the fact that the Federal Reserve is making such a strong decision shows confidence in the health of the labor market. However, the speed with which interest rates are expected to rise underscores his growing concern about the rising cost of living. High inflation is likely to force the Federal Reserve to raise interest rates several times in the coming months. Bank officials may resort to more significant rate hikes in an attempt to stem inflation.
Changing course after the pandemic
When the pandemic first hit the United States, the Federal Reserve took a series of emergency measures to support the economy. Among them, he cut interest rates to zero, which means that borrowing money was almost free. But while the “easy money” policy encouraged household and business spending, it fueled inflation and contributed to the state of the economy today.
Now that the economy no longer needs the support of the Federal Reserve, the central bank has taken steps to slow it down by raising interest rates.
The Fed’s actions will increase the interest rates banks charge each other for overnight loans to a range of 2.25% to 2.50%, the highest rate since December 2018.
What does a Federal Reserve hike mean?
The Fed increase would affect millions of American businesses and households, raising the cost of home, auto and other loans, as well as credit cards, to force a slowdown in the economy. Furthermore, mortgage rates have essentially doubled in the past year.
Families are not only dealing with the price impact of their purchases but are also under pressure from rising financial costs. But this is exactly what the Fed wants: to cool down intense demand to give supply a chance to recover and to ease rates.
The Fed’s Million Dollar Question
The question now is whether the Fed will be able to curb inflation without hurting the economy.
“Many questions remain about whether the economy can transition smoothly from happy a quote It depends both on its current situation and how the Fed conducts its policy from here, said David Kelly, chief global strategist at JPMorgan Asset Management.
The Fed must implement careful balancing action or its strategy may slow economic growth while inflation continues to rise. High and persistent inflation could lead to a loss of confidence in the ability of the central bank to fulfill its dual mandate of price stability and maximum employment. Federal Reserve Chairman Jerome Powell said the biggest risk to the economy would be persistent inflation, not deflation.
In the last 11 tightening cycles, the Fed has only avoided a recession three times. During each of those cycles, inflation was lower than it is today. This raised concerns for some analysts and market participants.
“Smooth economic development looks like a long opportunity from here,” said Sima Shah, chief strategist at Principal Global Investors. “Fed policy cannot directly affect food or energy inflation, while raising interest rates has done little so far to slow the core components of CPI. [Índice de Precios al Consumidor] which are traditionally considered more sensitive to monetary policy.”
With reporting from Matt Egan, Alicia Wallace, Nicole Goodkind and Lucy Bailey on CNN.