The Federal Reserve announced on Wednesday it has hiked interest rates another 75 basis points, as markets widely expected. It is the second 75 basis point move in a row, as the Fed seeks to tamp down rampant inflation, while avoiding an economic contraction that would plunge the economy into a recession. The last 75 basis point hike had been the largest single-meeting hike since 1994.

This was the fourth consecutive meeting to result in an increase to the Fed funds rate. Short-term borrowing rates have now risen to between 2.25% and 2.50%, roughly equivalent to rates in 2019.

The decision was unanimous among all voting members of the Federal Open Market Committee.

In the announcement, the Fed noted, “Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

The Fed added it “anticipates that ongoing increases in the target range will be appropriate.”

So far, inflation readings have yet to show any effect from prior increases, with the June reading coming in at 9.1% year over year. That was faster than at any time going back to November of 1981.

Policymakers have maintained one of the main causes of inflation today is the war in Ukraine, which has driven up energy prices globally, and that in turn has driven up the prices of everything else. However they have also acknowledged that one other factor was the low interest rates that were used during the pandemic to try and stimulate economic activity, and prevent the economy from going into a tailspin.

Since the economy has grown accustomed to such low rates, the Fed will have difficulty raising interest rates without triggering a slowdown in hiring and layoffs as the economy cools. In June the unemployment rate came in at 3.6%, which was almost near pre-pandemic lows however, so it is believed there is room to raise rates before unemployment becomes a dominant issue.

In elucidating its thinking going forward, the Fed described the jobs added as “robust” and noted that inflation, “remains elevated.”

The rate increase comes just ahead of the US Bureau of Economic Analysis’s second quarter GDP report, which may show a second quarter of economic contraction, the technical definition of a recession according to most sources. although the official call is made on a more broad set of measures by the National Bureau of Economic Research.

A negative result for the second quarter will only serve to heighten uncertainty about how high the Fed can raise rates, and how it will balance the economic threat of inflation vs the economic threat of raising interest rates and slowing the economy.

So far the Federal Reserve’s own estimate is it will need to raise rates to approximately 3.8% by sometime next year to slow inflation, though investors now suspect that estimate may be outdated, as inflation continues to come in unexpectedly high, and the economic slowdown appears to be happening increasingly fast.

Contemporaneous to this, the Fed has been unwinding some assets purchased during the pandemic in 2020 and 2021. In its announcement it did not note any changes in its plans for the unwind. That unwind is expected to accelerate until it is rolling off roughly $95 billion in assets per month by September.

At last enumeration, the Fed held approximately $9 trillion in assets earlier this year.

The Fed’s next release of economic projections as well as the next policy announcement will be on September 21st.

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