MNI: Fed Hikes Rates To 22-Year High, Leaves Room For More

The Federal Reserve raised interest rates to their highest level in more than two decades Wednesday and kept the door open to additional monetary tightening by offering little in the way of changes to its policy guidance. 

The FOMC unanimously raised the federal funds rate to 5.25-5.5%, the highest level since 2001, and reaffirmed its commitment to assess cumulative effects and lags of tightening “in determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time.”

Officials said they remain highly attentive to inflation risks. 

“Inflation remains elevated,” the Fed repeated in its post-meeting statement. “The Committee will continue to assess additional information and its implications for monetary policy.” 

The Fed's June Summary of Economic Projections showed a median forecast for the peak rate of 5.5%-5.75%.

The central bank started raising interest rates aggressively in March 2022 in response to a post-Covid surge in price pressures that took policymakers by surprise and left policy behind the curve. 

The adjustment was abrupt, leading to more than 500 basis points of tightening in less than 18 months, the fastest tightening campaign since the 1980s. 

Inflation has been gradually coming down, with the June CPI falling to 3.0%, the lowest since March 2021. But core inflation, which policymakers see as a window into future price growth trends, were still more than double the Fed’s 2% target at 4.8%.

The U.S. economy also shows little sign of slowing despite the Fed’s push to tightening lending conditions. The FOMC upgraded its assessment of growth to "moderate" from "modest." Wall Street forecasters think GDP likely expanded around an annual 2% clip for the second quarter in data due Thursday. 

At the same time, jobs remain plentiful and the labor market shows only scant signs of decelerating. The jobless rate remains near historic lows at 3.6%, jobless claims are relatively low and employment growth continues at a healthy clip that exceeds the gains necessary to keep up with population growth. 

“Job gains have been robust in recent months, and the unemployment rate has remained low,” the Fed said. 

Fed Chair Jerome Powell will hold a post-meeting press conference at 2:30, where he will face questions about the extent of further rate increases he believes might be needed in order to bring inflation firmly and sustainably under control.