Fed rate hike aims to fight inflation

`Strong action' to cool off economy, avert recession will mean higher borrowing costs for consumers

WASHINGTON >> The Federal Reserve intensified its fight against high inflation on Wednesday, raising its key interest rate by three-quarters of a point — the largest bump since 1994 — and signaling more rate hikes ahead as it tries to cool off the U.S. economy without causing a recession.

The unusually large rate hike came after data released Friday showed U.S. inflation rose last month to a four-decade high of 8.6% — a surprise jump that made financial markets uneasy about how the Fed would respond. The Fed's benchmark shortterm rate, which affects many consumer and business loans, will now be pegged to a range of 1.5% to 1.75% — and Fed policymakers forecast a doubling of that range by year's end.

“We thought strong action was warranted at this meeting, and we delivered that,” Fed Chair Jay Powell said at a news conference in which he stressed the central bank's commitment to do what it takes to bring inflation back down to the Fed's target rate of 2%, even if that resulted in a slightly higher unemployment rate.

Powell said it was imperative to go bigger than the half-point increase the Fed had earlier signaled because inflation was running hotter than anticipated — causing particular hardship on low-income Americans and solidifying the public's view that stubbornly high inflation won't be easily resolved.

Powell said that another three-quarter-point hike is possible at the Fed's next meeting in late July if inflation pressures remain high, although he said such increases would not be common. He said the economy is strong enough to endure higher rates without tipping into recession, a prospect that many economists are increasingly

worried about.

Some financial analysts suggested Powell struck the right balance to reassure markets, which rallied on Wednesday. “He hit it hard that `we want to get inflation down' but also hit hard that `we want a soft landing,' ” said Robert Tipp, chief investment strategist at PGIM Fixed Income.

Still, the Fed's action on Wednesday was an acknowledgment that it's struggling to curb the pace and persistence of inflation, which is being fueled by a strong labor market, pandemic-related supply disruptions and soaring energy prices that have been aggravated by Russia's invasion of Ukraine.

Some analysts said they welcomed the Fed's more aggressive posture. “The more the Fed does now, the less they will have to later,” said Thomas Garretson, senior portfolio strategist at RCB Wealth Management.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said Powell was right to acknowledge that the faster push on rates will cause pain for consumers. “It's going to be a far bumpier ride to get inflation down than what they had anticipated previously,” Luzzetti said.

Inflation has shot to the top of voter concerns in the months before Congress' midterm elections, souring the public's view of the economy, weakening President Joe Biden's approval ratings and raising the likelihood of Democratic losses in November. Biden has sought to show he recognizes the pain that inflation is causing American households but has struggled to find policy actions that might make a real difference. The president has stressed his belief that the power to curb inflation rests mainly with the Fed.

Yet the Fed's rate hikes are blunt tools for trying to lower inflation while also sustaining growth. Shortages of oil, gasoline and food are contributing to higher prices. Powell said several times during the news conference that such factors are out of the Fed's control and may force it to push rates even higher to ultimately bring down inflation.

Borrowing costs have already risen sharply across much of the U.S. economy in response to the Fed's moves, with the average 30-year fixed mortgage rate topping 5%, its highest level since before the 2008 financial crisis, up from just 3% at the start of the year.

Even if a recession can be avoided, economists say it's almost inevitable that the Fed will have to inflict some pain — most likely in the form of higher unemployment — as the price of defeating chronically high inflation.

Powell struck a defensive note when asked whether the Fed was now prepared to accept a recession as the price of curbing inflation and bringing it close to the Fed 2% target level.

“We're not trying to induce a recession now,” he said. “Let's be clear about that. We're trying to achieve 2% inflation.”

In their updated forecasts Wednesday, the Fed's policymakers indicated that after this year's rate increases, they foresee two more rate hikes by the end of 2023, at which point they expect inflation to finally fall below 3%, close to their target level. But they expect inflation to still be 5.2% at the end of this year, much higher than they'd estimated in March.

Over the next two years, the officials are forecasting a much weaker economy than was envisioned in March. They expect the unemployment rate to reach 3.7% by year's end and 3.9% by the end of 2023.

Stocks rallied on news of the rate increase. The S&P 500 was 1.9% higher in afternoon trading after several sudden moves up and down immediately after the Fed's announcement.

The Dow Jones Industrial Average also swerved up and down, and was back to a gain of 397 points, or 1.2%, at 30,706. The Nasdaq composite was 2.7% higher.