(CNN) –– The United States Federal Reserve increased interest rates once more by 0.75% in its fight once morest the clock for curb historical levels of inflation. The Fed’s decision comes just a month following which, in its most aggressive measure since 1994, increase rates by the same percentage.
This is the first time in its modern history that the Fed has raised interest rates twice in a row by three-quarters of a percentage point, something that seemed a long way off just six months ago. This contrasts with what was his policy during the last three decades of lowering or raising interest rates by an average of 0.25%, preferring to drive the economy at a slow speed. However, the very high inflation forced the central bank to take more aggressive measures to curb it.
“The labor market is extremely tight and inflation is too high,” Powell said in explaining the move.
At the conclusion of their July policy-making meeting on Wednesday, Federal Reserve members approved the hefty hike. And this unprecedented action underscores how far the Fed is willing to push the economy to moderate rising costs for Americans, amid the highest price increases since the 1980s.
Furthermore, the fact that the Fed is making this 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 regarding the rising cost of living. High inflation is likely to force the Federal Reserve to raise interest rates several more times in the coming months. Bank officials may even resort to further large rate hikes in a bid to stem inflation.
A change of course following the pandemic
(Credit: SAUL LOEB/AFP via Getty Images)
When the pandemic first hit the United States, the Federal Reserve put in place a series of emergency measures to support the economy. Among them, the reduction of interest rates to zero, which meant that borrowing money was almost free. But while that “easy money” policy encouraged household and business spending, it also fueled inflation and contributed to the state of the economy today.
Now that the economy no longer needs the Fed’s support, the central bank has been taking steps to slow it down by raising interest rates.
The Fed’s actions will increase the rate banks charge each other for overnight loans to a range of 2.25% to 2.50%, the highest since December 2018.
What does the Fed raise mean?
The Fed’s hike will impact 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. It’s more, mortgage rates have basically doubled During last year.
Families are not only dealing with the price impact of their purchases, they are also under pressure from higher financial costs. But that is precisely what the Fed wants: to cool red-hot demand to give supply a chance to recover and ease prices.
The million dollar question for the Fed
The question now is whether the Fed will be able to curb inflation without deeply hitting the economy.
“Many questions remain regarding whether the economy can transition smoothly from allegro a adagio, and it depends both on its current state and how the Fed will conduct policy from here,” said David Kelly, chief global strategist at JPMorgan Asset Management.
The Federal Reserve must execute a delicate balancing act or its strategy might slow economic growth while inflation continues to rise. Significant and entrenched inflation might lead to a loss of confidence that the central bank can deliver on its dual mandates of price stability and maximum employment. And Fed Chairman Jerome Powell has said the biggest risk to the economy would be persistent inflation, not an economic downturn.
In the last 11 tightening cycles, the Fed has only successfully avoided recession three times. And during each of those cycles, inflation was lower than it is today. That has raised concerns from some analysts and market participants.
“Smooth economic development feels like a long shot from here,” said Seema Shah, chief strategist at Principal Global Investors. “Fed policy cannot directly impact food or energy inflation, while rate hikes so far have done little to slow down the CPI’s core components. [Índice de Precios al Consumidor] which are traditionally more sensitive to monetary policy”.
With reporting from CNN’s Matt Egan, Alicia Wallace, Nicole Goodkind and Lucy Bayly.