Fed hikes interest rates .75% again, says U.S. not in recession
Posted on July 27, 2022
The Federal Reserve on Wednesday ordered another 0.75% interest rate hike amid increasing pressure to control high-running inflation that’s making essential items more expensive for Americans.
“I do not think the U.S. is currently in a recession,” Fed Chair Jerome Powell told reporters Wednesday. “The reason is there are too many areas of the economy that are performing too well.”
Powell said after the rate hike decision was announced Wednesday that the Fed is “strongly committed to bringing inflation back down and is moving expeditiously to do so.”
It’s essential to bring inflation back down to 2%, he said, adding that spending and production in the U.S. economy have softened and consumer spending has “softened significantly.”
Housing activity has weakened and business fixed investment declined in the second quarter, Powell said.
But the labor market remains very tight and strong, he said. Employment is rising by an average of 375,000 jobs per month. Underlying aggregate economic demand remains solid.
“We think it’s necessary to have growth slow down. We need a period of growth below potential in order to create some slack so the supply side catches up,” Powell said.
The Fed’s focus remains on getting inflation back down with price stability the bedrock of the U.S. economy.
This Federal Reserve increase is the second in two months. The Fed ordered the same increase at its meeting in June, which was the largest hike since 1994. The central bank went for a half-point increase in May.
The recent increases make it more expensive for Americans to borrow money, but it’s a move that traditionally helps to limit rising inflation. When combined with certain market conditions, more spending typically leads to higher inflation. The Fed considers the economy to be running at peak health when inflation is rising at a rate of 2%.
So far this year, the annual rates of inflation have been measured between 7% and 8% -- the highest levels in about 40 years. Last month, the Commerce Department said inflation was up 8.6% over the previous 12 months.
Inflation has been driven mostly by rising energy prices, especially gasoline. On Wednesday, the national average was $4.30 per gallon, a decline of 2 cents from Tuesday and almost 60 cents over the past month. File Photo by Jim Ruymen/UPI
“The Fed has told us they’re unlikely to let up on the brakes until they see a convincing shift in the trajectory of monthly inflation readings that would signal progress toward the Fed’s 2% target,” PGIM Fixed Income Lead Economist Ellen Gaske wrote in a memo, according to Yahoo Finance.
The .75% increase on Wednesday raised the Fed’s benchmark interest rate to between 2.25% to 2.5%.
Some economists warn that the Fed should avoid hiking interest rates too much and too abruptly, risking inadvertently creating a downturn.
“The question for the Fed is: Are we really heading into a recession?” Andrew Levin, a former Fed economist and a professor at Dartmouth College, said according to ABC News. “If so, is that going to slow the Fed’s efforts to fight inflation?”
Inflation has been driven mostly by rising energy prices, especially the cost of gasoline. Gas prices have been at record levels this year, but have been coming down over the past few weeks. AAA said on Wednesday that the national average was $4.30 per gallon -- a decline of 2 cents from Tuesday.
The Commerce Department will issue its second-quarter economic report on Thursday. Gross domestic product for the first quarter declined by 1.4%.