Fed shows US still needs to control inflation.
Fed shows US still needs to control inflation.
The Fed Raises Interest Rates to Combat Inflation
The Federal Reserve has recently made a critical move in its ongoing battle against inflation. On Wednesday, the Federal Open Market Committee announced a 25 basis point increase in interest rates, following a pause in rate hikes back in June. This decision comes amidst the backdrop of a gradual slowdown in inflation, with the latest Consumer Price Index data showing a 3.0% year-over-year increase in June, down from 4.0% in May. However, Fed Chair Jerome Powell has repeatedly emphasized the central bank’s commitment to achieving its 2% inflation target, suggesting that further rate hikes may be necessary to attain this goal.
“The main issue that we’re focused on now is determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time—so that the pace of the increases and the ultimate level of increases are separate variables, given how far we have come,” Powell stated during the June press conference. “It may make sense for rates to move higher but at a more moderate pace.”
While the exact number of future rate hikes remains uncertain for Americans, there are growing indications that the US economy may achieve a soft landing in 2023. At the beginning of the year, concerns of a looming recession were prevalent. However, Goldman Sachs’ Chief Economist Jan Hatzius recently revised the odds of a recession in the next 12 months from 25% to 20%, suggesting a reduced risk of severe economic downturn. Hatzius attributed this optimism to the recent data, reinforcing confidence that inflation can be brought down without the need for a recession.
Treasury Secretary Janet Yellen also shares this positive outlook. During a Bloomberg TV interview, Yellen highlighted the resilience of the labor market and expressed her belief that a recession is unlikely. She found the most recent inflation data to be encouraging, echoing the confidence shown by Powell and administration officials in the Fed’s efforts to combat inflation.
However, not everyone is convinced of the Fed’s strategy. Some Democratic lawmakers, such as Massachusetts Sen. Elizabeth Warren, have urged the central bank to halt rate hikes to safeguard Americans from potential consequences. Warren expressed concerns about the impact such tightening measures could have on marginalized communities, specifically citing rises in unemployment among Black workers.
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While Powell acknowledged the impact of rate hikes on Americans in June, the fight against inflation is far from over.
“I would almost say that the conditions that we need to see in place to get inflation down are coming into place,” Powell stated. “And that would be [real GDP] growth meaningfully below trend. It would be a labor market that’s loosening. It would be goods pipelines getting healthier and healthier and that kind of thing. The things are in place that we need to see, but the process of that actually working on inflation is going to take some time.”
In essence, the Federal Reserve’s decision to raise interest rates serves as a proactive measure aimed at taming inflation. While the exact number of future rate hikes remains uncertain, there are growing indications that a soft landing is possible for the US economy. Despite some skepticism from lawmakers, the Fed remains committed to its goal of achieving a 2% inflation target.
