The Federal Reserve announced Wednesday at the end of its May Federal Open Market Committee (FOMC) meeting that it’s raising the federal funds rate by 50 basis points.
The 50-basis point increase brought the federal funds rate to a targeted range of 0.75% to 1% as the committee seeks to bring inflation back down to its target of an average 2% over the long run.
“Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong,” the Fed said in its post-meeting statement. “Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
Inflation is currently at a new 40-year high, according to the Bureau of Labor Statistics (BLS). The Consumer Price Index (CPI) rose 8.5% annually in March, the highest rate of increase since December 1981.
“With inflation running at the highest pace in 40+ years, putting it at a lifetime high for most Millennials and younger generations, the Fed voted to raise the Fed Funds rate by 50 basis points,” Realtor.com Chief Economist Danielle Hale said. “This hike was widely expected following the Fed’s March meeting and intermeeting discussions.”
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Fed predicts it will likely continue to raise rates
When announcing the 50-basis point rate hike, the Federal Reserve said it “anticipates that ongoing increases in the target range will be appropriate.” And future rate hikes may be even higher than May’s, Hale said.
“Mortgage rates have already anticipated a fair amount of Fed tightening, but the market continues to ratchet up expectations for big Fed hikes throughout the rest of the year, already expecting a 75 basis point hike at June’s meeting,” Hale said. “Current market expectations exceed the Fed’s anticipation in its March economic projections, but inflation has continued to surprise, which could mean that the Fed’s views have changed by now, too.”
The Fed has not increased interest rates by 75 points since 1994, on its path from 3% to 6%, according to The Balance. A 75-basis point hike in June would increase the rate to a targeted range of 1.5% to 1.75%
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Economic risks remain
Although the economy is improving, the Fed said that several risks still remain. “The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” it said.
“The implications for the U.S. economy are highly uncertain,” the central bank stated. “The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.”
In addition to these risks, an economic slowdown could be ahead. In its latest economic forecast, Fannie Mae predicted that the economy will contract in 2023 due to the Fed’s monetary policy tightening.
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