Following a brief pause in its efforts to combat inflation last month, the Federal Reserve has resumed its battle by raising its benchmark interest rate to the highest level in 22 years. The central bank concluded a two-day policy meeting on Wednesday and announced a quarter point increase in the federal funds rate, bringing the Fed’s target rate to between 5.25% and 5.5%. Chair Jerome Powell stated that further rate hikes may be possible unless inflation continues to cool rapidly.
Powell emphasized the importance of maintaining a restrictive policy until inflation reaches the Fed’s 2% target sustainably. He acknowledged that the process is not yet complete and may require more tightening. The Fed’s current rate-hiking cycle, the most aggressive since the 1980s, has effectively tackled the highest bout of inflation in forty years by raising borrowing costs for consumers and businesses.
Since the central bank began tightening in March 2022, mortgage rates have more than doubled, and the costs of car loans and credit cards have surged. Technology companies and banks, which relied on low interest rates, have been adversely affected, leading to some businesses closing and others cutting jobs.
Despite inflation being at just half its level from a year ago, with prices rising at a 3% annual rate, the Fed remains concerned about core inflation. Core inflation, which excludes food and fuel prices, was at 4.8% last month, still significantly above the bank’s 2% target. The country continues to experience solid job growth and consumer spending, which raises concerns about a potential rebound in inflation. However, raising rates too high could increase the risk of a recession, according to some economists and business leaders.
The stock market remained relatively steady following the expected rate hike.
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