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Fed raises interest rates for fourth time this year to combat inflation

The central bank’s aggressive move comes as consumers prices are rising at the fastest pace in over 40 years.

WASHINGTON (CN) — The Federal Reserve announced another big interest rate hike Wednesday as part of its continuous efforts to bring inflation down from four-decade highs.

This is the second 0.75 basis point interest rate hike since June and the fourth increase so far this year. The three-quarter bump is the most aggressive hike since 1994 approved by the Federal Open Market Committee, the central bank’s panel of officials responsible for monetary policy.

The benchmark interest rate, which now stands at its highest level since 2018 at a range of 2.25% to 2.5%, affects consumer and business loans, from mortgages to credit cards and home equity lines of credit.

Increased interest rates mean costly investments for the average consumer such as buying a car or a home will be even more expensive, as well as to refinance mortgages or student loans.

However, by raising interest rates, the Fed seeks to tame inflation and slow down economic demand by making borrowing money more expensive. 

After the 2020 pandemic shutdowns crippled the global supply chain, it now struggles to catch up to the rapidly increasing demands from the reopened economy. Booming demand could also potentially be driven by the nation’s billionaires, who saw their combined wealth increase by 58% since the start of the pandemic.

Consumer prices rose 9.1% annually in June – the highest annual rate in 41 years – and 1.2% last month alone, according to Labor Department data released this month.

Chairman Jerome Powell said the Fed is working to lower inflation to its 2% annual target, which could involve a period of decreased economic growth.

“Supply constraints have been larger and longer lasting than anticipated and price pressures are evident across a broad range of goods and services,” said Powell. 

Some businesses began to see slowed activity this month as a result of the Fed’s continuous interest hikes, sparking concern that the central bank is moving too aggressively and will cause a recession. 
Consumers are also already showing signs of cutting back on spending, as potential home buyers are becoming discouraged by the rising mortgage rates combined with already high home prices.

Powell said during a press conference Wednesday that despite signs of a slowing economy, too many areas of the economy are performing too well for the U.S. to be in a recession right now. 

“The labor market has remained extremely tight with the unemployment rate near a 50-year low, job vacancy is near historical highs and wage growth has elevated,” said Powell. 

According to Powell, employers have added 2.7 million jobs since the beginning of the year. 

However, many employers have struggled to retain a full staff of workers as they have been forced to raise their wages to keep up with the pricey toll of inflation. 

Despite some companies benefiting from inflation if they can charge more for their products as a result of the high demand for their goods, the federal minimum wage has yet to be raised since 2009. 

While studies suggest that increasing the minimum wage doesn’t damage job growth even in a struggling economy, the Fed has failed to address how that could affect soaring inflation costs. 

On Thursday, the government will estimate the gross domestic product for the April-June period, which could potentially show that the economy shrank for a second straight quarter. 

“It's very hard to say with any confidence in normal times what the economy’s going to be doing in six or 12 months. You've got to take any estimates on what rates will be next year with a grain of salt because there's so much uncertainty,” said Powell. 

According to Powell, the Fed will examine incoming data and signs of the economy slowing to determine if another hike is necessary during their next meeting in September.  

“We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate,” he said. “The pace of those increases will continue to depend on the incoming data and evolving outlook for the economy.”

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