As has been anticipated by the markets, the US Federal Reserve raised its benchmark rate by 75 basis points. At the last meeting, the Federal Open Market Committee (FOMC) raised rates by 50 bps while setting an expectation the next rate increase would fall along the same lines. Unfortunately, rapidly rising inflation derailed this hope for another 50 bps increase as the annual rate of inflation was reported last week at a whopping 8.6%. The 75 bps increase is the most aggressive rate increase since 1994 and represents the fear of the faltering economy.
In its statement, the Fed said that while unemployment has remained low, inflation is elevated – a supply-demand imbalance is creating problems for the economy as prices rocket higher:
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1‑1/2 to 1-3/4 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 is strongly committed to returning inflation to its 2 percent objective.”
All of the FOMC committee members voted in support of the 75 bps increase with the exception of Esther George who preferred a 50 bps increase.
The Fed has been broadly criticized due to its apparent failure to respond to solid indications of inflation, labeling the phenomena as “transitory.” While some policymakers point a finger at the war in Ukraine, most observers believe that policy emanating out of Congress and the White House is the root cause of the problem. Some observers believe there is a good possibility of a “soft landing” but a growing number of individuals are predicting a recession.
Fed Chairman Jerome Powell will be holding a press meeting shortly to answer questions from the media.
