Fed hikes 75 basis points a second time, signals third is possible

Federal Reserve officials raised interest rates by 75 basis points for the second straight month and Chair Jerome Powell said a similar move was possible again, rejecting speculation that the US economy is in recession.

Policy makers, facing the hottest cost pressures in 40 years, lifted the target for the federal funds rate on Wednesday to a range of 2.25% to 2.5%.

Fed Chairman Jerome Powell has said that failing to restore price stability would be a “bigger mistake” than pushing the US into a recession. So the Fed will most probably take an aggressive stance of an at least 75 bps hike.

“The Fed is treading on a new course after an era of unprecedented monetary support, so more than the outcome of the meeting, the Fed’s guidance about the rate hike path ahead would be closely parsed by the market participants that will steer the direction of the markets going ahead,” said Sugandha Sachdeva, VP- commodity & currency research at Religare Broking.

Experts expect that after this month’s hike, there will be a 50 bps increase in September followed by a 25 bps hike in November and December to take the Feds Fund rate to 3.25-3.5 percent by the year-end.

That takes the cumulative June-July increase to 150 basis points — the steepest since the price-fighting era of Paul Volcker in the early 1980s.

“While another unusually large increase could be appropriate to our next meeting,” that’s a decision that will depend on the data between now and then, Powell said during a press conference following a two-day policy gathering in Washington.

Policy makers next gather Sept. 20-21; the two monthly readings on inflation and employment due before then will help determine the Fed’s next move.

President Joe Biden is facing political backlash for surging prices, which he has mainly blamed on the Russian invasion of Ukraine that has sent global food and energy prices soaring.

Biden insists the US economy will avoid a recession, but even as his approval ratings have cratered, he has supported the Fed in its battle to quell inflation.

Fed Chair Jerome Powell and others have made it clear they are willing to risk a downturn and will keep raising interest rates until they see solid evidence that inflation is moving back towards the two percent goal.

In a vote that was unanimous — unlike the decision made in June — the policy-setting Federal Open Market Committee raised the policy lending rate to a range of 2.25 to 2.5 percent, after starting the year near zero.

The central bank is betting that it can slow growth just enough to tame inflation yet not so much as to trigger a recession — a risk that many analysts fear may end badly.

In a statement the Fed issued after its latest policy meeting ended, it acknowledged that while “indicators of spending and production have softened,” “job gains have been robust in recent months, and the unemployment rate has remained low.” The Fed typically assigns high importance to the pace of hiring and pay growth because when more people earn paychecks, the resulting spending can fuel inflation.

Ian Shepherdson of Pantheon Macroeconomics noted that point, saying, “The Fed is not ready — yet — to concede that weaker growth is a reason to slow the pace of tightening,″ 

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