Fed raises interest rates sharply by 0.75% despite fears of recession

The Federal Reserve imposed the latest in a series of sharp interest rate hikes on Wednesday, a sign that policymakers are not backing down from an aggressive campaign to bring down inflation, which has been high for decades.

The Federal Open Market Committee on pricing raised the benchmark interest rate by 0.75%, or 75 basis points, at the end of a two-day meeting. The latest increase moved the Fed’s target range between 3% and 3.25%.

Fed officials have now raised the benchmark rate by three-quarters of a percentage point in three straight meetings. The three-quarter point hikes are the first of their kind since 1994 – an indication of the Fed’s urgency to lower prices.

Prior to the FOMC announcement, investors were pricing in an 82% chance of a three-quarter percentage point hike and an 18% chance of a full one-point hike. Yields on two-year Treasury bills climbed above 4% on expectation of a further rise.

The Fed was widely expected to implement another sharp rate hike after a dismal consumer price index in August rekindled fears about the persistence of inflation. This is despite growing investor fears that the Fed may not be able to pull off a “soft landing” and instead tip the economy into a recession with policy tightening.

NYSE Trader
Stocks have fallen steadily as the Fed tightens monetary policy.
Getty Images

Stocks have hit new lows in recent days as investors brace for an economic slowdown.

The Fed’s benchmark interest has direct and indirect effects that ripple throughout the economy. The hikes impact interest rates on credit cards, savings accounts, auto loans and other forms of borrowing.

They are also influencing mortgage rates, which jumped above 6% for the first time since 2008 and triggered a slowdown in the housing market.

Worried NYSE Trader
Investors fear that the Fed will tip the US economy into a recession.
Getty Images

Some critics, including billionaire Elon Musk and “Bond King” Jeffrey Gundlach, say the Fed risks causing destructive deflation by continuing to hike rates despite signs of a slowing economy.

“The Federal Reserve is likely tightening policy directly in the teeth of a recession. Many stock market investors are hoping for a dovish pivot, but the stock market’s reliance on Fed easing when stocks fall may be what Jerome Powell aims to negate by aggressively raising rates, on top of inflation,” said said Danielle DiMartino Booth, CEO and Chief Strategist. by Quill Intelligence.

Prices rose 8.3% more than expected in August, while core inflation, a measure that excludes volatility in food and energy prices, jumped 6.3%. Inflation is well above the 2% range that the Fed and the Treasury Department consider acceptable.

Federal Reserve
The Fed is under pressure to calm inflation.
Getty Images

The troubling federal data led some analysts to predict that the Fed would implement a one-point hike for the first time in several decades.

Even before the August CPI release, top policymakers including Fed Chairman Jerome Powell were indicating that aggressive rate hikes were in store for the US economy.

In a speech earlier this month, Powell acknowledged that the Fed was aware of the risk of “premature policy easing.” He added that the central bank was “strongly committed to this project and we will stay with it until the job is done.”

Powell warned that the increases would continue even if it brought “some pain” for American households – including a rise in the national unemployment rate.

In a separate speech, Fed Vice Chairman Lael Brainard said officials pledged to tighten policy conditions “for as long as it takes to bring inflation down.”

About Joel Simmons

Check Also

UK recession: what does it mean for me and will it impact jobs?

The UK is in the early stages of what could be a major economic crisis …