1 of 5 | Federal Reserve Chairman Jerome Powell, pictured testifying before a Senate Banking, Housing, and Urban Affairs Committee in March, on Wednesday said the Fed will be looking for inflation to move back into normal territory at its next meetings before determining future rate changes. Pool photo by Tom Williams/UPI | License Photo
June 15 (UPI) -- Amid persistent concerns about rising costs in the United States, the Federal Reserve on Wednesday concluded a two-day policy meeting and did something it hasn't done in almost 30 years -- hike key interest rates by .75%.
The move was widely expected by most analysts and is seen as a necessary measure to get a better handle on rising inflation.
The last time the central bank increased rates by .75% was 1994 -- just before the U.S. economy boomed for the remainder of the 1990s.
After the announcement, Fed Chairman Jerome Powell discussed Wednesday's .75% rate increase and explained the reasoning behind it.
"The labor market is extremely tight and inflation is much too high," Powell said. "Against this backdrop today the Federal Open Market Committee raised its policy interest rate by .75% and anticipates ongoing increases to that rate will be appropriate."
"My colleagues and I are acutely aware that high inflation poses a significant hardship especially on those least able to meet the higher costs of essentials like food, housing and transportation," Powell said.
"Inflation has surprised to the upside. In response to these developments, the committee decided that a larger increase within the target range was warranted at today's meeting," he said.
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 said 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 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.
Chairman Powell also discussed future rate hikes and what the American people can expect moving forward.
"Over the coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%," Powell said. "Clearly today's 75-basis point increase is an unusually large one and I do not expect moves of this size to be common."
"We are determined to take measures to restore price stability. The American economy is very strong and well-positioned to handle tighter monetary policy," he said.
Goldman Sachs this week adjusted its forecast and said it expected .75% hikes 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. With Wednesday's hike, the rate is between 1.5% and 1.75%.
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.
Over the past year, the rising costs of energy have fueled inflation in the United States. Gas prices are 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
In 1994, then-Fed Chairman Alan Greenspan achieved a soft landing when interest rates reached 6% over seven rate hikes -- including two half-point increases and .75% increase to stem inflation after a recession in the early 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.
"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."
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 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 2021.
The Fed's decision on Wednesday had an immediate impact on Wall Street. By 2:15 p.m., the Dow Jones Industrial Average was up about 140 points. The S&P 500 was up about 30 points and the Nasdaq composite had increased by almost 180 points.
President Joe Biden participates in a virtual meeting with leaders of the Major Economies Forum on Energy and Climate (MEF), at the Eisenhower Executive Office Building on the White House complex on Friday. Biden reconvened leaders of the MEF to discuss setting future emissions standards, energy and food security, and to 'tackle the climate crisis', according to a White House statement. Photo by Michael Reynolds/UPI | License Photo