Politico

Fed deploys supersized rate hikes, ending era of easy money

The Federal Reserve on Wednesday pulled the trigger on another supersized interest rate hike, ushering in an end to easy money policies in its bid to battle the worst inflation since Ronald Reagan’s presidency.

Fed officials increased rates by three-quarters of a percentage point, bringing their main policy rate to its highest level since 2019. The central bank has signaled it will raise borrowing costs further throughout the year, which would make debt more expensive than at any time since the 2008 financial crisis.

The central bank slashed rates at the beginning of the pandemic to encourage lending and boost growth as the economy entered a brief but deep recession. With its move Wednesday, it has removed that support for the economy. That means that now the Fed will be taking inflation on more directly and its moves could cut into growth — and the still-healthy job market — more severely.

Already, the Fed’s actions have contributed to a slowdown in the economy, raising fears that the U.S. might be tipping into recession. Manufacturing output is slowing, wage growth is decelerating and the housing market is cooling, all signs that rate hikes are starting to wend their way through the country. On Thursday, the government reports on the April-June GDP numbers, which the Atlanta Fed says could show a contraction for the second straight quarter.

“We’re not trying to have a recession, and we don’t think we have to,” Fed Chair Jerome Powell said. But the path to avoiding recession has “narrowed and may narrow further.”

Still, Powell said at the post-meeting press conference that while the rate hikes “have been large and they’ve come quickly,” it’s likely that “their full effect has not been felt by the economy.”

“Over the coming months, we will be looking for compelling evidence that inflation is moving down consistent with inflation returning to 2 percent,” he said. “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then.”

This is the fourth time the central bank has raised rates this year, and the second time it has opted for a 0.75 percentage point increase, three times the standard size. The 75-basis-point hike lifted the Fed’s benchmark to a range of 2.25 percent to 2.5 percent target.

Job growth has been by far the most positive trend in the economy as the U.S. has emerged from the depths of the pandemic. The economy added a net 372,000 jobs in June, a surprisingly rapid pace given that the unemployment rate already sits at 3.6 percent. But the labor market is showing signs of cracks in the face of higher rates, wage growth is decelerating and jobless claims have reached their highest weekly level since mid-November.

Ideally, the Fed would bring down inflation without significantly hurting wage growth. But the harder the central bank hits the brakes on the economy, the more that will hurt hiring and lead to layoffs and pay cuts.

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