There was an increase of three-quarters of a percentage point to the Federal Reserve’s benchmark interest rate target on Wednesday. Due to its decision, the Federal Open Market Committee, which determines interest rates, will increase the overnight interbank funding rate from 1.50 percent to 1.75 percent to 2.25 percent to 2.5 percent. The Fed also announced it would raise the rate it pays on reserve balances to 2.40 percent.
As a result, the interest rate has increased 0.75 points twice in a row, an unprecedented rate of increases in modern times. The Federal Reserve used to target the money supply size before the 1980s.
The Fed reports that recent indicators of spending and production have weakened, but job gains have been robust, and the unemployment rate remains low. As a result of the pandemic, higher food and energy prices, and broader price pressures, inflation remains elevated. The Russian invasion of Ukraine was cited by the Fed as a factor contributing to inflation that is causing Human and economic hardships. Global economic activity is being impacted by this war and related events, which are pushing up inflation.
Also, the Fed said it would continue to reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities at a rate of $47.5 billion per month until September when it anticipates increasing it to $95 billion per month.
As bonds mature, the Fed will not replace them, a process known as allowing the bonds to “roll off.” The Fed currently has a nearly $9 trillion balance sheet following the financial crisis of 2008 and the pandemic-related bond purchases. For the foreseeable future, the Fed will continue to buy bonds since the roll-off pace will be controlled rather than left to the bonds’ expiration.
Its staff economists and officials disagree about the effects of its large-scale asset purchases on inflation and balance sheet growth. Some officials consider balance sheet reductions to be equivalent to rate increases, another form of monetary tightening.
A day before the government is scheduled to release its second quarter economic growth report, the Fed raised interest rates. The economy, however, may have contracted in the second quarter, according to a growing minority of analysts.
U.S. economic growth declined by 1.6 percent in the first quarter. Two consecutive quarterly contractions are usually considered a recession. The Biden administration has maintained that the economy is not in a recession even if it shrinks in the second quarter, citing the historically low unemployment rate. According to critics, the administration is trying to redefine recession to avoid being held responsible for a severe recession.
However, the debate is likely to become moot in the near future. Most economists now believe that a recession will start in the first half of next year, with many thinking that it will begin as early as the middle of the year. There are some who believe it will arrive even earlier. Bank of America prediction that the economy will be in a recession this year.