NEW YORK: United States Federal Reserve officials raised interest rates by 75 basis points for the second straight month, delivering the most aggressive tightening in more than a generation to curb surging inflation -- but risking a sharp blow to the economy.
Policy makers, facing the hottest price pressures in 40 years, lifted the target range for the federal funds rate on Wednesday to 2.25% to 2.5%. That takes the cumulative June-July increase to 150 basis points -- the steepest rise since the price-fighting era of Paul Volcker in the early 1980s.
The Federal Open Market Committee (FOMC) “is strongly committed to returning inflation to its 2% objective,” it said in a statement released in Washington, repeating the previous language that it’s “highly attentive to inflation risks.” The FOMC reiterated it “anticipates that ongoing increases in the target range will be appropriate,” and that it would adjust policy if risks emerge that could impede attaining its goals, reported foreign media.
US stocks remained higher after the decision. Short-term Treasury yields rose and the dollar fell. The FOMC vote, which included two new members -- Vice Chair for Supervision Michael Barr and Boston Fed President Susan Collins -- was unanimous. Barr’s addition to the board earlier this month gave it a full complement of seven governors for the first time since 2013.
Criticised for misjudging inflation and being slow to respond, officials are now forcefully raising interest rates to cool the economy, even if that risks tipping it into recession. Higher rates are already having an impact on the US economy. The effects are particularly evident in the housing market, where sales have slowed.
While Fed officials maintain that they can manage a so-called “soft landing” for the economy and avoid a steep downturn, a number of analysts say it will take a recession with mounting unemployment to significantly slow price gains.
The FOMC noted Wednesday that “recent indicators of spending and production have softened,” but also pointed out that job gains “have been robust in recent months, and the unemployment rate has remained low.”
The latest increase puts rates near Fed policy makers’ estimates of neutral -- the level that neither speeds up nor slows down the economy. Forecasts in mid-June showed officials expected to raise rates to about 3.4% this year and 3.8% in 2023.