Just in the middle of this week, the Federal Reserve had enacted an interest rate at 0.75 percentage points. This is the second consecutive time that Fed revised rates, this can be a step to do away with runaway inflation, by not creating a recession.
This has taken the benchmark almost overnight, with the borrowing rate that is up to a range of 2.25% to 2.5%. The months of June and July have been representing consecutive actions ever since the Fed had used the overnight funds which acted as the principal tool for monetary policy, and this was in the early 1990s.
Usually, the rate of fed funds directly impacts what the banks are going to charge each other in the case of short-term loans, where it takes into account things like car loans, mortgages that can be adjusted, and also credit cards. With this increase, the funds have been rated to their highest level since December 2018.
The stock market had been expecting this move right after the Fed officials had telegraphed an increase in a series of statements ever since the June meeting had taken place. Right after this, the stocks had been hitting their highs, more so with Jerome Powell, Fed Chair leaving the door open about the next move during their meeting in September, as he held the opinion that everything would depend on data now.
According to Powell, when the stance of monetary policy tightens, it will be more appropriate to slow down the pace of increases, and on their end, they will assess how their cumulative policy adjustments will be affecting both the economy and inflation.
After their meeting, the rate-setting Federal Open Market Committee opined that in the last three months there have been robust job gains, with the unemployment rate remaining really low. This statement of the committee was quite similar to the June statement, and most of the officials called inflation to be “elevated”.
Powell added that he does not think that the US economy is in recession, even though the growth has been quite negative in the first quarter, and it was expected to turn out to be positive in the second quarter. He further emphasized on recession and defined it to be a broad-based decline that hits many industries which has been prevalent for a couple of months, it doesn’t seem like what’s happening now, said Powell.
He identified the labor market which has been a strong signal of economic strength that kind of questions the GDP data to be one of the reasons for the ongoing situation. The increase in rate hikes comes at a time and a year when the year began with rates that were floating around zero, but this has been commonly referred to as the “inflation measure run” which runs at 9.1% annually.
The Central Bank has faced critics too, first for being really slow, while tightening when inflation first hit in 2021, and secondly, because it had gone too far and caused a severe economic downturn.