Fed Raises Rates By 75 Basis Points In July 2022

[ad_1]

The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 75 basis points (bp) at its meetings between July 26-27, 2022. The new target range is 2.25% to 2.50%.

The FOMC’s press release stated: “Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.” The FOMC also “anticipates that ongoing increases in the target range will be appropriate.”

Key Takeaways

  • The Federal Open Market Committee (FOMC) voted to increase the fed funds rate by 75 basis points at its meeting on July 26-27, 2022.
  • The new target range for fed funds is 2.25% to 2.50%.
  • It cited “robust” job gains, a low unemployment rate, and “elevated” inflation as its reasons.
  • The FOMC also expects that additional interest rate increases will be necessary to drive inflation back down to the long term policy goal of 2% annually.
  • The FOMC sees Russia’s ongoing war on Ukraine as key factor driving inflationary pressures.
  • The Fed will continue with the balance sheet reduction plan announced in May.

Unanimous Vote

All 12 voting members present at the meeting voted in favor of the 75 basis point rate increase. Among them were Federal Reserve Board (FRB) Chair Jerome Powell and FRB Vice Chair Lael Brainard.

Economic Threat From Russia’s War on Ukraine

The FOMC statement also noted: “Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”

Reducing the Fed’s Balance Sheet

The FOMC statement indicated that the Fed’s balance sheet will continue to be reduce according to a plan announced in May 2022. According to this plan, the Fed will reduce its bond holdings by $47.5 billion per month in June, July, and August 2022, thereafter increasing this amount to $95 billion per month.

Discount Rate Hike May Follow

In addition to the federal funds rate, another key interest rate set by the Fed is the federal discount rate. The former is the interest rate at which commercial banks can make overnight loans to each other. The latter is the interest rate on overnight loans extended by the Fed itself to commercial banks and other depository institutions. In the wake of the hike in the former, the latter soon may rise as well.

In the two days following the FOMC’s last increase of the federal funds rate, announced on June 15, 2022, 11 of the 12 regional Federal Reserve Banks announced increases in their discount rates. Mirroring the hike of 75 bp in the federal funds rate, these regional Federal Reserve Banks boosted their discount rates by 75 basis points as well, setting them at 1.75% and thus making them equal to the upper bound of the target range for the federal funds rate that was announced on June 15.

[ad_2]

Image and article originally from www.investopedia.com. Read the original article here.