Fed hikes interest rates to 22-year high as inflation fight resumes

The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter of a point, resuming its campaign to increase borrowing costs and crush inflation after a brief pause in June.

The unanimous decision puts the key benchmark federal funds rate at a range of 5.25% to 5.5%, the highest since 2001, further restricting economic activity as the borrowing costs for homes, cars and other items march higher.

It marks the 11th rate increase aimed at combating high inflation since policymakers began tightening in March 2022. 

Policymakers also left the door open to additional interest rate increases this year, despite a recent pullback in inflation. 

SILVER LINING OF HIGHER INTEREST RATES: SAVINGS ACCOUNT RATES

“The Committee will continue to assess additional information and its implications for monetary policy,” the post-meeting statement said. It was nearly identical to the statement released by the U.S. central bank in June.

“In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

The Fed is scheduled to meet three more times this year, in September, November and December.

Although investors are betting that this will be the final rate increase in the Fed’s tightening cycle, others are less sure because of the surprisingly resilient economy, which could threaten to refuel inflation.

Against all odds, the labor market has remained very tight. Demand for workers continues to outstrip the number of jobs available. That imbalance could keep wages elevated, leaving companies no choice but to raise prices to offset those labor costs. 

While inflation has eased from a peak of 9.1%, it remains above both the pre-pandemic average and the Fed’s 2% target rate.

Core prices, which exclude the more volatile measurements of food and energy, are also running at a pace more than double the Fed’s goal, pointing to strong underlying price pressures that are still bubbling beneath the surface.

“Whether or not the Fed hikes rates again may be beside the point,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “The important takeaways are that interest rates are likely to remain elevated for quite a while, and that these levels aren’t necessarily an impediment to continued economic growth or stock market performance.”

This is a developing story. Please check back for updates.