In a Bid to Finish Off Inflation, Fed Raises Interest Rate to 22-Year High

With the economy’s inflation fever showing signs of breaking, the Fed is administering more of its tough medicine.

As widely expected, the Federal Reserve raised its benchmark interest rate by a quarter-point Wednesday, bringing it to a range of 5.25% to 5.5%, its highest since early 2001. It was the 11th hike in the central bank’s campaign of anti-inflation measures that began in March 2022, and possibly its last for the time being. 

In a statement, officials on the Federal Open Market Committee indicated they were keeping their options open for more rate hikes to make sure inflation, which is already in retreat, is thoroughly quashed. However, they left the door open to hold the fed funds rate flat.

"It is certainly possible that we would raise funds again at the September meeting if the data warranted," said Federal Reserve Chair Jerome Powell at a press conference Wednesday. "And I would also say it's possible that we would choose to hold steady at that meeting."

The latest rate hike underscored the Fed’s determination to thoroughly subdue inflation. Price increases as measured by the Consumer Price Index have already fallen to an annual rate of 3% as of June, down from its recent peak of 9.1% the year before. If inflation slows down to the Fed’s desired 2% annual rate and the economy doesn’t fall into a recession, the central bank will have pulled off a delicate balancing act.

The Fed has raised its interest rate, and hence, all kinds of borrowing costs that are tied to it, in an effort to slow the economy and cool inflation by restoring the balance between supply and demand. However, the Fed risks slowing the economy too much and causing a recession. Indeed, the last nine times the Fed hiked rates to control rapid inflation, eight ended in a recession, according to an analysis by Piper Sandler. 

This time could be different, however. The economy has stayed surprisingly resilient, prompting economists to continually push back their predictions for when a recession will begin. Forecasters have grown less certain there will even be one as employers have stayed in hiring mode and people have kept shopping, keeping the main engine of economic growth—consumer spending—humming along.

As of Wednesday morning, traders mostly anticipated that the latest rate hike would be the final one, according to the CME Group’s FedWatch tool, which forecasts Fed rate hikes based on fed futures trading data. Meanwhile, Fed officials themselves have signaled one further rate hike is in store, according to projections released in June.

The outcome will likely depend on whether inflation continues to recede. Officials will have two more months of inflation data to consider by September when the Fed’s policy-setting committee next meets.

"By stressing their data-dependent approach in the post-meeting statement, policymakers have built in the flexibility to change course if inflation’s current downward trend stalls or reverses," Matt Colyar, an economist at Moody's Analytics, said in a commentary.