Fed raises rates again as it weighs how much further to go

The Federal Reserve pressed on with its fight against inflation Wednesday, raising interest rates to their highest level in 22 years.

But it’s still not clear how much harder officials will push to slow price increases.

The economy has shown remarkable resilience in the face of aggressive Fed action and inflation rates that, while improving, have remained above normal for nearly two years.

Businesses are still hiring, and consumers are still spending – key signs that have zapped fears that a recession is around the corner.

But the central bank is far from satisfied, with Chair Jerome H. Powell making clear that there is more work ahead to snuff inflation out altogether, even after Wednesday’s interest rate increase of 0.25 percentage points.

The asterisk, though, is that officials don’t know precisely when they will raise rates again, leaning heavily on a slew of data over the coming weeks and months that will clarify how households, businesses and the broader economy are faring.

“We think we need to stay on task,” Powell said at a news conference after the Fed’s rate hike announcement.

“We think we’re going to need to hold policy at restricted levels for some time. And we need to be prepared to raise further, if we think that’s appropriate.”

Central bankers have been resolute in their fight to tame high prices, making clear that they won’t let up prematurely.

That has led the Fed to hike its benchmark policy rate more than five percentage points since March 2022, a historic pace designed to cool demand for all kinds of goods and services, including mortgage rates, auto loans and hiring.

The move Wednesday, which was widely expected, brings the federal funds rate to between 5.25 and 5.5%.

The decision comes at a tricky time. Last month, officials left rates unchanged so that they could understand what was happening in the economy, including with the job market, inflation and wages.

The latest inflation data showed more progress than the Fed expected, but Powell noted Wednesday that “it’s only one report.”

There are also various reasons inflation has eased – some of which have little to do with the Fed’s actions.

Supply chains have cleared their backlogs, helping tame prices for all kinds of goods. Energy prices have also come down from last year’s surge, which was prompted by Russia’s invasion of Ukraine.

Still, a measure of “core” inflation – one that strips out volatile categories like food and energy, plus housing – isn’t letting up.

That measure stems largely from wage pressures and mismatches in the labor market, including in service industries that have struggled to find workers.

The Fed is essentially trying to tweak rates gently so that they don’t go too far and send the economy into a recession.

It’s too soon to tell, though, exactly what the right pace and rate levels are to avoid that, and the Fed is hesitant to put too much weight in a single data point that breaks their way.

“It’s really dependent so much on the data,” Powell said of future moves. “And we just don’t have it yet.”

That approach stands in stark contrast to how the Fed operated last year when it doled out massive rate hikes while taking heat that it wasn’t doing enough to slash rising prices.

After that, the central bank met growing criticism from liberal economists and members of Congress who said it was overcorrecting and engineering a recession that would hit the job market with a thud.

But now, some of those voices have quieted as Fed watchers wait to see if inflation eases in all parts of the economy and if a recession can be avoided after all.

“I think everyone is hopeful they have found that middle path, and these disinflationary trends in the data have reinforced that hope,” said Tim Duy, chief U.S. economist at SGH Macro Advisors and a Fed expert at the University of Oregon.

“I think it’s still an open question of what inflation looks like after used cars and shelter wash through. But we’re not going to know that for six months or nine months.”

In addition to Wednesday’s decision, the Fed has indicated plans to raise rates one more time this year.

Powell repeatedly said that could happen at any of the upcoming meetings in September, November and December, and that officials have not settled on any cadence.

Instead, they’ll scrutinize changes in the economy.

By the time Fed officials convene in the third week of September, they’ll have two more jobs reports and two more inflation reports, plus additional data on wages.

“I would say it is certainly possible that we would raise (rates) again at the September meeting if the data warranted,” Powell said. “And I would also say it’s possible that we would choose to hold steady at that meeting.”

Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, said the Fed appeared to be signaling that officials weren’t as worried anymore about the timing of their hikes.

Because there’s no meeting in August, the next possible increase is nearly two months away now.

The takeaway, Strain said, was that the Fed comes off as no longer in emergency mode “and has this implicit confidence that things are proceeding in such a way that we’re basically at the end of the story.”

So far, major parts of the economy suggest the Fed might be inching closer to a “soft landing” – where inflation would return to normal levels without a sharp recession.

Consumer demand and spending has stayed much stronger than economists anticipated. Many Americans have more in the bank than before the coronavirus pandemic and are still spending.

Wages are rising faster than inflation. The unemployment rate is at a hot 3.6% – the same level as when the Fed began raising rates in March 2022 – and the job market has grown for 30 consecutive months.

The housing market underwent a brief recession last year, but it is already turning around. And rents are starting to cool.

The Fed’s statement Wednesday said economic activity was expanding at a “moderate pace” – a subtle but notable shift from last month, when officials said the economy was growing at just a “modest pace.”

Powell added that the Fed staff, which worried this spring about a “mild” recession, is no longer forecasting a downturn in the near future.

Still, reading the economy is difficult in real time. Rate hikes work with a lag, and it’s unclear when the full scope of the Fed’s policies will hit.

Experts say the banking crisis in March will also continue to slow bank lending and tighten credit conditions, but it will take time to see how strong those effects are.

Major stock market indexes had mixed but muted reactions to the Fed’s latest move, rising immediately after the announcement and then dropping again slightly.

At the close, the Dow Jones Industrial Average was up 0.2%. The S&P 500 index was essentially flat, and the Nasdaq dipped 0.1%.

The nonpartisan Congressional Budget Office on Wednesday also projected that inflation would continue to fall as the economy cools, with the Fed’s preferred price index dropping to 3.3% for this year and then down to 2.6% next year.

As inflation abates, the CBO projects, the economy will also slow down more generally.

The CBO reports that the economy will only grow by 1.5% next year – a downward revision from the 2.5% it previously projected – in large part because of higher-than-expected interest rates.

Those interest rates, in turn, are projected to lead to decreased levels of consumer spending, business investment and net exports.

Pandemic-era savings that helped consumer spending are beginning to dwindle as well.

“Rising delinquency rates on credit cards and consumer loans suggest that some earners have exhausted their savings and will have less wherewithal to maintain spending in the face of elevated interest rates and unemployment,” the report states.