US Fed & Jerome Powell Announce A 0.75% Increase In Fed Funds Rate
- US Federal Reserve inflation target is 2 percent over the long run, compared to 9.1 percent now
- US economy not in recession; US jobs growth at more than 350,000 additional workers each month
- Federal Reserve acknowledges that the US economy is slowing and may need to slow more to achieve is inflation target
- If inflation does not begin to slow, "another unusually large (rate) increase could be appropriate," according to Federal Reserve Chairman
- Next Federal Reserve meeting is September 21, two successive 75 basis points increases may show evidence of slowing inflation.
75 basis points interest rate increase
In a brief 313-word statement The Federal Reserve Chairman Jerome Powell explained why the three quarters of one percent rise in the target range for the Federal Reserve funds rate is appropriate. In short, the Federal Reserve has a fixation on achieving a 2 percent inflation rate over the long run, when inflation is currently 9.1 percent. This extraordinary high inflation rate is measured by reference to the change in the US consumer price index over the preceding 12 months to June 2022. Inflation at this level implies that the Federal Reserve is likely to continue hiking the funds rate in the months ahead.
In support of the 2 percent inflation target, the Committee decided to raise the target range for the Federal Funds rate to between two and a quarter percent and two and a half percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the “Plans for Reducing the Size of the Federal Reserve's Balance Sheet,” that were issued in May. The Committee’s report clearly stated that it is strongly committed to returning inflation to 2 percent. The Committee, however, seeks to achieve maximum employment at the same time as it slows the economy to achieve its stated inflation rate target over the longer run.
Powell’s statement suggests that the Federal Reserve does not consider that the US economy is in recession or likely to go into recession anytime soon. In support of his view, he cited an unemployment rate that is still near a half-century low and solid wage growth and job gains. "It doesn't make sense that the U.S. would be in recession," he said. His statement is supported by the fact that U.S. firms continue to hire more than 350,000 additional workers each month. Powell noted that recent indicators of spending and production have softened. He went on to acknowledge that inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. “The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity’, he added.
Markets greeted the rate increase with cautious optimism, with the Dow up 1.37 percent and the broader S & P 500 index up 2.6 percent. The 10-year US Bond market showed little change at 2.8 percent. This is most likely because the size of the rate increase was anticipated by bond traders a month ago when the US 10-year Bond yield was higher at 3.2 percent.
In Wednesday’s statement accompanying the rate decision, Chairman Jerome Powell acknowledged that "a sustained period" of economic weakness and a slowing jobs market, may be a necessary outcome in achieving the 2 percent inflation target. This is the dilemma facing Central Banks all over the world in responding to the highest inflation rate in more than 40 years. Powell went on to acknowledge that the US economy was slowing and may need to slow more for the Federal Reserve to achieve is inflation target.
Chairman Powell is adamant that the behaviour of inflation would drive the Fed's course, and that if inflation does not begin to slow, "another unusually large (rate) increase could be appropriate," when the Fed next meets. However, the next Federal Reserve meeting is scheduled for September 21. Considerable economic data, including monthly inflation readings for July and August, may give the Federal Reserve enough evidence that the impact of 2 successive 75 basis points rate increases is slowing the inflation rate. This may be an inflexion point in the fight against inflation if evidence of a slowing inflation rate were to emerge.