Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.
On June 15, the Federal Reserve announced its biggest interest rate increase in nearly 30 years. It raised the federal funds rate by 75 basis points (bps), to a range of 1.50% to 1.75%.
This move follows smaller rate hikes at the March and May Federal Open Market Committee (FOMC) meetings—all part of the central bank’s strategy to fight stubbornly high inflation.
The Fed’s decision today is more aggressive than the 50 bps increase that had been expected until very recently.
In a press conference, Fed Chair Jerome Powell said that the Fed had hoped to see inflation flatten by now but recent upticks in the Personal Consumption Expenditures (PCE) Price Index and the Consumer Price Index (CPI) made it clear that tougher measures than a 50 bps increase were needed.
The latest PCE reading showed prices up 6.3% over the prior 12 months. Fed economists estimate that PCE inflation will remain high, but should decline to 5.2% by the end of 2022. Note that is hotter than the 4.3% forecast made back in March.
Powell also warned that employment would slow in the next year.
“The median projection in the SEP [Summary of Economic Projections] for the unemployment rate rises somewhat over the next few years, moving from 3.7 percent at the end of this year to 4.1 percent in 2024, levels that are noticeably above the March projections,” he said.
Read more: The Personal Consumption Expenditures (PCE) Price Index
Raging financial market volatility is increasing pressure on the Fed to act on prices. After a week of steady losses, the benchmark S&P 500 index slipped into bear market territory on Monday.
Unfortunately for stretched consumers, inflation can take a long time to get under control, and it may take several months for the Fed’s moves to work their way into the economy.
Why Is the Fed Raising Rates?
The short answer: To get record-high inflation under control.
Americans have been slammed by double-point percentage increases on the prices of just about everything they need to survive: Food. Gas. Utilities.
Changing the target for the federal funds rate is one of the few tools the central bank can employ to stabilize an overheated economy and moderate demand for goods, which can reduce inflation.
For months, Powell and other Fed officials have been repeating over and over that the four-decade highs in U.S. inflation rates were making tighter monetary policy an absolute necessity. It’s also become clear that the jobs market has almost entirely healed as the Covid-19 pandemic wanes.
<…….
Source: https://www.forbes.com/advisor/personal-finance/75-point-highest-fed-rate-increase-in-28-years/