MNI: Fed Hikes Rates Another 75 bps, Flags Weaker Growth

The Federal Reserve on Wednesday raised interest rates by three quarters of a percentage point, matching last month’s unusually large increase and punctuating one of the most aggressive monetary tightening campaigns in the central bank’s history.

The unanimous decision pushed the federal funds rate to a range of 2.25%-2.50%, levels consistent with what Fed policymakers have said they consider “neutral” – neither stimulative nor restrictive.

“Recent indicators of spending and production have softened,” the FOMC said in its post-meeting statement. “Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low.”

The FOMC reiterated its guidance that “ongoing increases in the target range will be appropriate” and continued to characterize inflation as remaining elevated.  

A surge in the CPI to another four-decade peak of 9.1% in the year to June raised concern that inflation pressures may be getting further out of the Fed’s control.

“The committee is highly attentive to inflation risks,” the FOMC said. 

At the same time, a drop in the University of Michigan consumer inflation expectations over a five- to ten-year horizon alleviated concerns that longer-run inflation expectations, central to the Fed’s rate-setting strategy, were starting to drift higher. 

Financial markets have begun pulling back some of their own projections for how high interest rates will need to go given a plunge in commodity prices, falling inflation expectations, and increasing fears about a possible recession. 

The Fed's June Summary of Economic Projections signaled a median terminal rate of 3.8% in 2023, but markets don't think fed funds will climb past 3.3%. 

Fed Chair Jerome Powell has previously said the Fed needs to raise interest rates to “moderately restrictive” levels and minutes from the June FOMC meeting indicate widespread agreement on that point.