August 16, 2022

Federal Reserve Makes Another Supersized Rate Increase to Tame Inflation

“We might do another unusually large rate increase,” Mr. Powell said on Wednesday. “But that is not a decision we have made at all.”

Mr. Powell said the likely path of interest rates that the Fed outlined earlier this year — in which rates rise to about 3.5 percent this year — remains reasonable. The Fed will likely lift borrowing costs to “at least a moderately restrictive level,” at which they are more actively weighing down the economy, he said.

But the mere recognition that growth is cracking and that rate increases will eventually slacken was enough to appease investors. The SP 500 stock index ended the day up 2.6 percent, and the Nasdaq Composite posted its best day since April 2020. Markets can quickly change their tune, though. The last two times the Fed has raised rates, the SP 500 has rallied on the day of the announcement, only to fall the day after.

“At some point it will be appropriate to slow down,” Mr. Powell said. “We are going to be guided by the data.”

For now, the data — at least when it comes to inflation — remain worrying.

Consumer prices climbed by 9.1 percent in the year through June, with costs picking up quickly across an array of goods and services, from food and fuel to rent and dry cleaning.

The Fed will receive a new reading of its preferred inflation measure, the Personal Consumption Expenditures index, on Friday. That report is likely to confirm the signal sent by the more timely Consumer Price Index: Inflation was extremely rapid in June, rising at the fastest pace in decades.

Article source: https://www.nytimes.com/2022/07/27/business/economy/fed-interest-rate-inflation.html

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