Federal Reserve expected to order rare 3/4-point interest rate hike
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Amid persistent concerns about rising costs in the United States, the Federal Reserve on Wednesday will conclude a policy meeting and is expected to do something it hasn't done in almost 30 years to get control of inflation.Many analysts expect the Fed to hike interest rates by three-quarters of a point -- a sizable increase it hasn't made in decades. The last time the central bank increased rates by that much was 1994 -- just before the U.S. economy boomed for the remainder of the 1990s.
When the Federal Reserve raises rates, it usually does so in quarter-point increments. But with consumer inflation rising at an annual rate of about 8.6%, which is far above the Fed's target range, analysts feel that the central bank has to be aggressive. The Fed increased rates by a half-point at its last policy meeting in early May, which was its largest increase since 2000.
Too much consumer spending combined with other certain market conditions can cause inflation to rise. By increasing interest rates, the Fed is attempting to get Americans to borrow less, lower demand and freeze prices.
The Federal Reserve will announce its decision at 2 p.m. EDT Wednesday.
Over the past year, the rising costs of energy have fueled inflation in the United States. Gas prices are now over $5 per gallon in several states and AAA said the national average was $5.01 on Wednesday, a slight decrease from Tuesday. File Photo by Gary Rothstein/UPI
Goldman Sachs this week adjusted its forecast and expects a three-quarter-point rate hike on Wednesday and at the Fed's next policy meeting in July, followed by a half-point increase in September. From there, the Fed will make quarter-point hikes in November and December, the investment bank projected.
That would raise the federal funds rate to between 3.25% and 3.5% by the end of 2022. Presently, interest rates are between 3/4% and 1%.
Federal Reserve Chairman Jerome Powell expressed some optimism in March about a "soft landing" for the recovering economy, which has been disrupted by COVID-19 and the Russian war in Ukraine. Energy prices, notably gasoline, have been the primary driver of inflation over the past several months.
"I believe that the historical record provides some grounds for optimism: Soft, or at least soft-ish, landings have been relatively common," Powell said at the time.
In 1994, then-Fed Chairman Alan Greenspan achieved a soft landing when interest rates reached 6% over seven different rate hikes -- including two half-point increases and a three-quarter-point increase to stem inflation after a recession in the early part of the 1990s.
Some economists note, however, that Greenspan proactively raised rates to get ahead of inflation while Powell has mostly been reactionary. Greenspan was also aided by a robust workforce as baby boomers entered the pinnacle of their careers and immigration numbers were strong. Today, Powell faces a different workforce that's been whittled down by the COVID-19 pandemic.Federal Reserve Chairman Alan Greenspan was faced with rising inflation following a recession in the early 1990s. After a series of interest rate hikes in 1994 -- including a three-quarter-point increase -- the U.S. economy boomed for the remainder of the decade. File Photo by Chris Corder/UPI
"In the past, when you've pushed up the unemployment rate, you've almost never been able to avoid a full-fledged recession," former New York Federal Reserve Bank President Bill Dudley told CNN. "The problem the Fed faces is they're just late."
Presently, the national unemployment rate is historically low at about 3.6%, the Labor Department said in its jobs report for May. After COVID-19 arrived in early 2020, the unemployment rate soared to more than 15%. Ten years ago, the unemployment rate was about 8%.
The full economic and inflationary outcome that will result from Wednesday's anticipated rate increase, and the rate hikes for the rest of 2022, won't be known for months.
The Labor Department said last week that consumer prices are up about 8.6% over the past 12 months. On Tuesday, it said producer prices -- the cost of goods at the wholesale level, before they reach consumers -- are up 10.8% since May of 2021.
The Fed's decision on Wednesday is expected to have a significant impact on Wall Street. On Tuesday, the Dow Jones Industrial Average fell by about 150 points, while the S&P 500 shed about 15 points. The Nasdaq composite, meanwhile, was up by about 20 points.