The Federal Reserve on Wednesday raised its benchmark interest rate by a hefty three-quarters of a point for a second straight time in its most aggressive drive in three decades to tame high inflation. The Fed's move will raise its key rate, which affects many consumer and business loans, to a range of 2.25% to 2.5%, its highest level since 2018, reports the AP. Prior to last month, the Fed had last raised rates by 0.75 point in 1994. The central bank's decision reflects its strenuous efforts to slow price gains across the economy. The Wall Street Journal reports the decision was a unanimous one; CNBC notes one member of the rate-setting committee dissented in June.
By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation. The central bank is betting that it can slow growth just enough to tame inflation yet not so much as to trigger a recession—a risk that many analysts fear may end badly. Economists at Bank of America foresee a "mild" recession later this year. Goldman Sachs analysts estimate a 50-50 likelihood of a recession within two years. Among analysts who foresee a recession, most predict that it will prove relatively mild. The unemployment rate, they note, is near a 50-year low, and households are overall in solid financial shape, with more cash and smaller debts than after the housing bubble burst in 2008.
Fed officials have suggested that at its new level, their key short-term rate will neither stimulate growth nor restrict it—what they call a "neutral" level. Chair Jerome Powell has said the Fed wants its key rate to reach neutral relatively quickly. Should the economy continue to show signs of slowing, the Fed may moderate the size of its rate hikes as soon as its next meeting in September, perhaps to a half-point. Such an increase, followed by possibly quarter-point hikes in November and December, would still raise the Fed’s short-term rate to 3.25% to 3.5% by year’s end—the highest point since 2008.
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