Christopher Rugaber | AP Economics Writer
In its 11th increase in 17 months, the Federal Reserve has raised its key interest rate with the intention of curbing inflation but also risking a potential recession.
This move has raised the Fed’s benchmark short-term rate from 5.1% to 5.3%, the highest level since 2001. Consequently, it could lead to increased costs for mortgages, auto loans, credit cards, and business borrowing.
Despite inflation easing to a two-year low, this rate hike reflects the concern of Fed officials that the economy is still growing too quickly for inflation to fall back to their 2% target. Consumer confidence is at a two-year high, with Americans continuing to spend on travel, entertainment, and other activities. Furthermore, businesses are maintaining hiring rates, indicating a healthy job market.
The Fed’s statement acknowledges that the economy has been expanding at a moderate pace, suggesting that it is slightly healthier than previously thought.
The critical question now is whether this increase will be the last or if there will be further hikes later this year. Fed Chair Jerome Powell has highlighted that no decisions have been made yet, but the battle against inflation is ongoing.
Powell emphasized that the policymakers will assess a range of economic data before taking any action at the next policy meeting in September. This includes two inflation reports, two reports on hiring and unemployment, and updated figures on consumer spending and wages.
Some economists believe that the Fed may opt not to increase rates in September, with the possibility of a hike in November.
In recent weeks, certain Fed officials have expressed concern that the rapid pace of job growth could lead to demands for higher wages, potentially perpetuating inflation. However, the easing of inflationary pressures has increased hopes that the Fed can achieve a “soft landing,” cooling inflation without causing a recession.
Several large banks, including Goldman Sachs and Deutsche Bank, have also revised their recession forecasts downward, indicating more confidence in the economy’s direction.
Matthew Luzzetti, Deutsche Bank’s chief U.S. economist, cited durable consumer spending as a key driver of growth. Many Americans still have savings from the pandemic, which has contributed to this spending.
Hiring has remained strong, with 209,000 jobs added in June and an unemployment rate of 3.6%. This is similar to the job market conditions when the Fed began raising rates in 2022.
While year-over-year inflation in June stood at 3%, down from a peak of 9.1% in 2022, an inflation measure preferred by the Fed remains at 4.6% in May compared to the previous year. This indicates that further efforts are needed to reach the Fed’s 2% target.
Some Fed officials believe that the cumulative impacts of previous rate hikes have already affected the economy. They argue that additional hikes may be necessary to further slow down price pressures and meet the inflation target.
However, other experts believe that the recent low inflation readings can be sustained. They predict that rental costs will continue to decrease as more apartment buildings are completed.
Although the Fed began tightening credit before other central banks, many countries are now following suit. The European Central Bank is expected to announce its own rate hike, while the Bank of Japan is likely to keep its policies unchanged. The Bank of England has been more aggressive, raising its key rate to a 15-year high.
On Friday, the U.S. government will release fresh data on consumer spending and an update on the Fed’s preferred inflation gauge. The inflation measure is expected to slow to 3%, down from a 3.8% increase in May.
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