Everything the Fed Just Did in Response to Inflation

The Hike

With inflation at 8.6% per May’s CPI, the highest level since 1981, the Fed hiked its target rate by 75-basis-points. That’s the largest increase since 1994.

The Federal Reserve’s Effective Federal Funds Rate guides what banks and lending institutions charge each other to borrow money. The move is part of the central bank’s tightening monetary policy, which aims to slow down the rate at which prices are increasing. When rates rise it costs people more to use credit cards for example, putting pressure on consumer spending. When that activity dips, prices start to descend.

The target rate is now a range between 1.5% and 1.75%. It hasn’t been that high since before the COVID-19 pandemic and its related restrictions took hold.

Adjusted Outlook

The Fed hiked rates by 0.5 percentage points at their meetings in June and May, after enacting a 0.25 percentage point hike in March. Most Wall Street observers originally anticipated another 50-basis-point hike yesterday, but recent market conditions may have altered that thinking.

Stocks sold off in a major way on Monday, leading some to anticipate the larger hike. Now investors are trying to figure out where rates will go from here.

To that end, the FOMC or Federal Open Market Committee released new economic projections while also announcing the rate hike. Its members now predict GDP growth for 2022 of 1.7% — down from 2.8% in March. The FOMC also anticipates inflation to keep rising. Analysis suggests rates need to rise by 1.75% to 2% before the end of the year to reach the central bank’s goals.

The Chairman’s Speech

Fed Chair Jerome Powell says it’s reasonable to expect a 50- or 75-basis-point hike at the central bank’s next meeting. He referred to Wednesday’s hike as “unusually large” and said he doesn’t expect them to be common.

Some on Wall Street applauded the move, suggesting it’s better to enact a larger hike now rather than delay the inevitable. Others wanted to see an even more aggressive hike, perhaps a full percentage point. The Fed is attempting to balance the need to slow down the rise of prices while also considering the economy as a whole. Rising rates and quantitative tightening (QT) put pressure on growth, and some say the central bank’s tightening monetary policy will lead to a recession.

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