Federal Reserve officials raised interest rates to their highest level in 22 years, continuing their 16-month-long campaign to wrestle inflation lower by cooling the US economy.
Officials pushed rates to a range of 5.25 per cent to 5.5 per cent, their highest level since 2001, while leaving the door open to further rate increases in the statement announcing their unanimous decision.
Fed policymakers began to raise rates from near-zero in March 2022 and pushed them up rapidly last year before adjusting them more slowly in 2023, even pausing in June. Because officials think that rates are now high enough to weigh on the economy, they have been moving more gradually to give themselves time to see how growth, the job market and inflation data are responding to the shift in policy.
Higher interest rates cool the economy by making it more expensive to borrow money, discouraging business expansions and making it more expensive to take out a mortgage or a car loan. But it takes time for them to trickle out through the economy, so the full effects of the moves so far likely have yet to be felt. That makes it tough to gauge how high is sufficiently high. Policymakers want to make sure that they temper demand enough to put an end to rapid price increases, but they would prefer to avoid plunging the economy into a recession if they can avoid it.
Economists have recently become increasingly hopeful that the Fed might be able to slow inflation without causing an outright downturn, clinching what is often called a soft landing. Inflation has finally begun to subside notably at a time when hiring still remains strong and unemployment is hovering at very low levels. In a nod to that resilience, officials noted Wednesday that the economy is expanding at a “moderate” pace, an upgrade from “modest” in their June statement.
But Fed officials may not feel comfortable that inflation will return fully to their 2 per cent goal at a time when growth remains so robust. If consumer spending continues to chug along, companies may still have the wherewithal to raise prices without losing customers. Although the slowdown in inflation so far is welcome news, it has not been driven primarily by their policy changes, but by a slow return to normal after years of pandemic-related disruptions across a range of products, from cars to couches.
“The committee will continue to assess additional information and its implications for monetary policy,” Fed officials said in their statement. Central bankers reiterated that they will take into account how much rates have already climbed and both economic and financial developments as they weigh to what extent further policy change “may be appropriate.”
The Fed projected in June that it would make two more rate increases this year — the one it ushered in Wednesday, and then a follow-up at some point in the future. Investors and some economists have speculated that officials may hold off on that second rate move in light of the recent slowdown in inflation.
But policymakers have little reason to signal clearly what comes next. They do not need to make another decision on interest rates until Sept. 20, because there is no August policy meeting. That is also the next time they will release a fresh set of quarterly economic projections.
And if they choose to skip raising rates at that next meeting — keeping up the every-other-meeting pattern established in June — that would take policymakers to their Nov. 1 meeting before they need to make a big rate decision.
Some Fed officials — including Mary C. Daly, the president of the Federal Reserve Bank of San Francisco — have said that they want to keep their options open for now. Christopher J. Waller, a Fed governor, suggested that he would favor moving rates up in September if inflation is looking hot, but could be open to holding off if price increases continue to cool.
“The September meeting is a ‘live’ meeting and it depends on the data,” Waller said at an event in New York after the latest consumer price index inflation report showed a notable slowdown. “We’ll get two more CPI reports. If they look like the last two, the data would suggest maybe stopping.”