The Federal Reserve increased its benchmark interest rate on Wednesday for the 11th time in the past 17 months.
These increases are aimed at containing inflation but run the risk of going too far and starting a recession.
The action increased the Fed’s short-term benchmark rate from around 5.1% to 5.3%, which is the highest level since 2001.
The Fed’s most recent action could result in more price hikes for mortgages, auto loans, credit cards, and business borrowing on top of its prior rate hikes.
Although inflation has slowed to its lowest rate in two years, Wednesday’s increase indicates the Fed’s concern that the economy is still expanding too quickly for inflation to return to its target of 2%.
American consumers continue to spend money, packing airlines, flying abroad, and thronging to concerts and movie theaters as consumer confidence reaches its highest point in two years.
The unemployment rate is still close to half-century lows, which is significant since firms continue to hire.
According to a statement from the Fed, the economy “has been expanding at a moderate pace,” a small improvement over its June estimate. It’s encouraging that they now perceive the economy as slightly stronger than they did just one month ago.
Whether or not the Fed will raise rates again this year after the increase on Wednesday is one of the important questions that is currently being discussed.
After the Fed issued its most recent rate rise, Chair Jerome Powell indicated the institution had not made any judgments regarding additional rate hikes.
However, he was clear that the battle against inflation is far from over. There is still a long way to go before inflation reaches 2%, according to Powell.
He emphasized that in order to decide whether or not to take action at their next policy meeting, the Fed’s policymakers will consider a variety of incoming economic indicators.
The last time the authorities met, in June, they indicated that they anticipated double-digit rate increases.
Powell said on Wednesday that by the time they meet again on September 19–20, they will have substantially more data available, including two additional inflation reports, two reports on hiring and unemployment, and updated statistics on consumer spending and earnings.
According to some economists, the Fed may decide against raising rates in September before considering doing so at its meeting in November.
Several Fed officials have expressed concern in recent weeks that the steady pace of job growth could prompt employees to demand greater wages to offset two years of price increases.
Sharp pay increases can fuel inflation if businesses react by boosting customer pricing. Nevertheless, the gradual decline in inflationary pressures has raised expectations that the Fed might achieve a challenging “soft landing,” in which case its rate hikes would keep inflation under control without plunging the economy into a harsh recession.
From 35% earlier this year, Goldman Sachs economists have reduced the probability of a recession to just 20% today.
Also pleased are those at Deutsche Bank, one of the first major firms to predict a recession.
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