Federal Reserve approved the third straight three quarters percentage point increase in interest rates. This signaled that there would be more rises at two of its remaining meetings.
Officials agreed Wednesday to lift the benchmark federal-funds rate to a range between three percent and 3.25 percent, the highest since 2008.
The market indicated there was a possibility of a larger increase than the 75-basis-point raise that investors had anticipated.
“Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,”The Federal Open Market Committee released a unanimous statement at Wednesday’s end of its meeting.
Markets have rallied following each of the Fed’s interest rate announcements this year as investors decided time after time that Fed chair Jerome Powell appeared to be signaling a softer approach ahead. Powell made a convincing speech last month at the Jackson Hole, Wyoming monetary policy conference that Powell would continue to fight inflation, and wouldn’t reduce rates next year, even though the economy is in decline.
U.S. inflation began to increase March 2021, as more people sought it after the economic recovery and the Biden administration’s new rounds of stimulus. Initial Fed officials mistook inflation to be an episode that was likely to have been linked to what they called “a short episode”. “transitory”Factors such as disruptions in supply chains or a lower labor force participation rates are some of the reasons. Fed officials now recognize this error and are frantically increasing rates to prevent inflation becoming even more entrenched.
The average core inflation rate, which does not include food or energy prices, was 0.5 percent in the last 12 months. This has resulted in a price increase of 6.3%. Core prices rose just 0.3% in July as inflation appeared to be decreasing. This was however short-lived. Core prices rose 0.6 percent in August.
At Jackson Hole, Powell said that the Fed’s tightening of financial conditions would likely inflict pain on households and businesses. According to the Fed, there are nearly two jobs available for each unemployed person in a labor market that is dangerously tight.
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