By Howard Schneider and Ann Saphir
WASHINGTON (Reuters) -The Federal Reserve raised its benchmark overnight interest rate by three-quarters of a percentage point on Wednesday in an effort to cool the most intense breakout of inflation since the 1980s, and U.S. central bank chief Jerome Powell said another “unusually large” hike may be appropriate in September if price pressures have not sufficiently abated.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the rate-setting Federal Open Market Committee said as it lifted the policy rate to a range of between 2.25% and 2.50%.
The FOMC added that it remains “highly attentive” to inflation risks. Powell emphasized that point in a news conference after the release of the unanimous policy decision, saying it was “essential” to bring inflation lower.
Fed officials are “acutely aware” of the hardship that inflation imposes on American households, particularly for those with limited means, Powell said, and they will not relent in their effort until presented with “compelling evidence” that inflation is coming down.
Inflation has surged this year to four-decade highs and, when measured by the Fed’s preferred gauge, is running at more than three times the central bank’s 2% target.
“Restoring price stability is just something we got to do,” Powell said. “There isn’t an option to fail to do that.”
While jobs gains have remained “robust,” officials noted in the new policy statement that “recent indicators of spending and production have softened,” a nod to the fact that the aggressive rate hikes they have put in place since March are beginning to bite.
Still, Powell insisted the economy enjoys underlying strength.
“I do not think the U.S. is currently in a recession,” he said, citing an unemployment rate that is still near a half-century low and solid wage growth and job gains. “It doesn’t make sense that the U.S. would be in recession.”
But bringing inflation down to the Fed’s goal “is likely to involve a period of below-trend economic growth, and some softening of labor market conditions, but such outcomes are likely necessary to restore price stability and to set the stage for achieving maximum employment and stable prices over the longer run.”
Coming on top of a 75-basis-point hike last month and smaller moves in May and March, the Fed has raised its policy rate by a total of 225 basis points this year as it battles a 1980s-level breakout of inflation with 1980s-style monetary policy.
The policy rate is now at the level most Fed officials feel has a neutral economic impact, in effect marking the end of pandemic-era efforts to encourage household and business spending with cheap money. The rate also matches the high point of the central bank’s previous tightening cycle from late 2015 to late 2018, a level reached this time in the span of just four months.
The latest policy statement gave little explicit guidance about what steps the Fed may take next, a decision that will depend heavily on whether upcoming data shows inflation beginning to slow.
With the most recent data showing consumer prices rising at more than a 9% annual rate, investors expect the U.S. central bank to raise its policy rate by at least half a percentage point at its Sept. 20-21 meeting.
“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” Powell said. “We will continue to make our decisions meeting by meeting, and communicate our thinking as clearly as possible.”
Futures markets tied to Fed policy expectations tilted somewhat back toward a more moderate increase for the next meeting as Powell spoke.
In the U.S. Treasury market, which plays a key role in the transmission of Fed policy decisions into the real economy, yields on the 2-year note most sensitive to policy expectations moved lower. The yield on the 10-year note was little changed.
Stocks on Wall Street added to broad gains in the session, with the S&P 500 index closing 2.6% higher, while the dollar weakened against a basket of major trading partners’ currencies.
“From here, it is possible that the Fed slows its tightening pace, reassured by the likely peaking of inflation and pullback in inflation expectations as oil prices have fallen,” Seema Shah, chief global strategist at Principal Global Investors, said in a note. “However, with the labor market still a picture of strength, wage growth still uncomfortably high and core inflation set to decline at a glacially slow pace, the Fed certainly cannot stop tightening, nor can it down shift gears too much.”
(Reporting by Howard Schneider and Ann Saphir; Editing by Dan Burns and Paul Simao)