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The Federal Reserve Raises Rates 0.75%

The Federal Reserve

The Federal Reserve on Wednesday raised interest rates by 0.75%, the largest move it has made since 1994. 

The central bank messaged that further interest rate hikes will come this year, as the Fed leans on higher borrowing costs to dampen demand and work to slow faster than expected inflation. 

“Overall economic activity appears to have picked up after edging down in the first quarter,” the policy-setting Federal Open Market Committee said in a staement, repeating its commitment to “ongoing increases.”

The Fed decision lifted short-term borrowing costs to a target range between 1.50% and 1.75%.

In economic projections released Wednesday, the median Fed policymaker expects to further raise interest rates to roughly 3.4% by the end of the year. That would suggest another 1.75% in total rate hikes, spread across the remaining four scheduled policy meetings this year.

The Fed is now messaging a much steeper path of rate hikes than it had previously forecast in March (when the median member projected a year-end short-term rate closer to 1.9%).

The urgency to move faster coincided with Fed policymakers’ expectations that inflation will not abate as fast as they had expected in their March projections. The median Fed policymaker now expects prices to rise by 5.2%, as measured by personal consumption expenditures (PCE), over the course of 2022, a faster pace than the 4.3% it had forecast in March.

The central bank also downgraded expectations on other key economic measures, expecting the U.S. economy to grow by only 1.7% this year, compared to the 2.8% it had forecast in March.

The urgency to move faster coincided with Fed policymakers’ expectations that inflation will not abate as fast as they had expected in their March projections. The median Fed policymaker now expects prices to rise by 5.2%, as measured by personal consumption expenditures (PCE), over the course of 2022, a faster pace than the 4.3% it had forecast in March.

The decision to raise interest rates by 0.75% was an abrupt turn from last week, when markets had largely expected the central bank to follow through on its widely communicated 0.50% 

However, the hotter than expected inflation report on Friday, showing the fastest pace of price increases since 1981, showed little sign of alleviating price pressures. Combined with other economic data showing the worst reading of consumer confidence since the 1970s, the pessimistic outlook pushed the Fed to take a more agressive action to tackle the current inflationary challenges.

Fed officials also suggested they could see unemployment rise this year, with the median member now forecasting a 3.7% headline unemployment rate by the end of the year (which would be a notch up from the 3.6% recorded in May). 

The Fed expects “ongoing increases” of three quarters of a percentage point “will be appropriate,” although it is unclear exactly how many, or at which meetings the Fed will implement them. (Kansas City Fed President Esther George voted against the rate decision, preferring the smaller hike of 0.50%.)

The Fed’s economic projections suggests confidence among policymakers that a more aggressive rate hike path will cool inflation. 

Although the central bankers raised their expectations on inflation for 2022, the median member of the committee expects to see the pace of headline price increases to cool to 2.6% next year. These forecasts suggest inflation could further cool down in 2024 to 2.2%, which is much closer to the Fed’s 2% target. 

The next FOMC meeting will take place the last week of July.

Disclaimer: This content is only intended for informational purposes. Before making any investment, you should always do your own research and analysis.

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