Business & Economy

Fed resumes tightening with quarter-point rate hike

Washington, Jul 26 (EFE).- The US Federal Reserve raised its benchmark interest rate by a quarter-point on Wednesday, a move that comes after the central bank decided to pause its monetary tightening in June.

The decision after the latest two-day meeting of the Federal Open Market Committee, the central bank’s policy-making body, lifts the federal-funds rate to a target range of between 5.25 percent and 5.5 percent, its highest level since 2001.

The move was expected after the Fed, which has been laser-focused on inflation over the past 16 months and remains highly committed to bringing it down to its target rate of 2 percent, cautioned that it would likely need to approve new increases in the federal-funds rate prior to year’s end.

As an additional inflation-fighting measure, the FOMC also said it will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities – an approach known as “quantitative tightening.”

The impact of the Fed’s moves has been clearly evident.

The US inflation rate fell to its lowest point in more than two years in June, when consumer prices were just 3 percent higher than in the same month of 2022.

The US inflation rate has fallen for 12 consecutive months dating back to June 2022, when it rose to a 40-year high of 9.1 percent.

Nevertheless, Fed Chairman Jerome Powell said that even though “inflation has moderated somewhat since the middle of last year … the process of getting inflation back down to 2 percent has a long way to go.”

Soaring consumer prices triggered by the pandemic-triggered lockdowns and the war in Ukraine led the Fed to start raising interest rates on March 17, 2022.

Its first rate hike was just one quarter point, but that was followed by a half-point increase and then four straight three-quarter-point hikes between June and November.

Prior to the pause in June, the FOMC’s last in a series of 10 consecutive rate hikes occurred on May 3, when the members voted for a quarter-point increase.

The easing of the rate hikes became more necessary due to banking system uncertainty following the failures of Silicon Valley Bank and Signature Bank and the $30 billion rescue of First Republic Bank in March.

The labor market has remained strong despite the monetary tightening, with 209,000 net jobs created in June and the unemployment rate falling last month by one-tenth of a percentage point to 3.6 percent.

The Fed’s action on Wednesday was in line with the assessment of the International Monetary Fund.

In a press conference on Tuesday, the IMF’s chief economist, Pierre-Olivier Gourinchas, cautioned Tuesday that it “remains critical to avoid easing monetary policy until underlying inflation shows clear signs of sustained cooling.”


Related Articles

Back to top button