The Federal Reserve raised interest rates to the highest level in 22 years and left the door open to additional increases as officials fine-tune their effort to further quell inflation.
The quarter percentage-point hike, a unanimous decision, lifted the target range for the Fed’s benchmark federal funds rate to 5.25% to 5.5%, the highest level since 2001. It marked the 11th increase since March 2022, when the rate was near zero.
“The committee will continue to assess additional information and its implications for monetary policy,” the central bank’s Federal Open Market Committee said in a statement published Wednesday in Washington, which overall was almost identical to its previous statement in June.
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Together, those sentences suggest that officials are holding their options open to either hike again at their next meeting in September, or pause or skip an increase depending on incoming data.
Fed Chair Jerome Powell will offer more guidance at a 2:30 p.m. press conference.
The Fed has since early last year engaged in the most aggressive tightening campaign since the 1980s in an effort to curb inflation, which in 2022 hit a 40-year high. While policymakers paused rate hikes last month to assess the impact of previous moves, they also signaled at the time that two more increases would probably be appropriate by the end of the year.
The latest hike was widely anticipated after recent reports showed a resilient economy that has largely withstood higher interest rates so far. But ahead of Wednesday’s decision, investors saw a second increase as less certain, in part because of data on consumer prices showing inflation receded sharply last month.
The FOMC in its statement Wednesday repeated its description of inflation as “elevated,” and upgraded its description of economic growth to “moderate” from “modest.” It reiterated that the banking sector is “sound and resilient,” while cautioning that credit tightening is expected to weigh on the economy following the failures of three US regional banks earlier this year.
While June’s consumer-price report showed inflation decelerating to 3% from last year’s 9.1% peak, policymakers have expressed concern about so-called “core” inflation, excluding food and energy, which has been slower to come down. They have singled out service-sector inflation in particular as a category they believe remains elevated due to tight labor markets.
Fed officials have also been surprised by the resilience of economic growth. Forecasters expect a quarterly report on gross domestic product due Thursday to show the US economy expanded by an annualized 1.8% in the April to June period. Some Wall Street economists have pushed back calls for a recession this year in light of the ongoing strength in economic activity alongside receding price pressures.
The FOMC next meets on Sept. 19-20 and subsequently on Oct. 31-Nov. 1. Powell will also have an opportunity to clarify the central bank’s view on the future path of rates at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, in late August.
– By Steve Matthews with assistance from Chris Middleton. (Bloomberg News)