The Fed raised rates by 0.75% the largest rate increase since 1994. This aggressive move is part of contractionary monetary policy aimed at fighting persistent high inflation that reached 8.6% in May, a 1.0% increase from April. Fighting inflation caused by supply constraints, high energy prices, demand imbalances, and broader price pressures was pointed as of the highest priorities of the Central Bank during Wednesdays’ meeting.
The purpose of such measure is to achieve inflation at the rate of 2% over the longer run, to meet its target the Central Bank decided to raise the federal funds rate to 1-1/2 to 1-3/4 percent, and will continue reducing the size of its balance sheet by reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities. The institution also expects more rate increases in upcoming meetings as it monitors inflation rate movements.
Impacts of the measure are starting to be felt across US economic activity. The housing market is slowing down because of high mortgage rates, and unemployment is projected to rise from “3.7% at the end of this year to 4.1% in 2024” as reported by Fed officials. Another, foreseeable impact is the decrease in new investments by corporates in the country, with a raise in interest rates and economic uncertainty companies may hold on businesses expansion decisions. The head of Wells Fargo Bank, Charlie Scharf, pointed out that it “it’s going to be hard to avoid some kind of recession”.
The Fed chair, Jerome Powell, ended his Wednesday’s statement with an optimistic view of the current state of the economy and the adopted measures, according to him “the American economy is very strong and well positioned to handle tighter monetary policy”. However, specialists suggest that the Fed’s position can do more harm than good. Ian Shepherdson, chief economist for the Pantheon Macroeconomics, said that “the forces which have driven recent inflation numbers are already fading” he added that the increase of 75 basis points now or in the future, could trigger a downturn due to its harmful impacts to private sector wealth.