In what is anticipated to be the final move in its hastily initiated campaign last year to combat unprecedented inflation by raising borrowing costs, the Federal Reserve (Fed) raises rates amidst anti-inflation on Wednesday.
The Federal Open Market Committee of the central bank decided to raise interest rates by a quarter of a percentage point after a two-day meeting in Washington, DC.
Fed Raises Overnight Rate and Inflation Concerns
The benchmark overnight rate set by the central bank will increase to a range of 5.25% to 5.5%. That is higher than it has been in many years.
The Fed set a short-term target rate of 5.25% for 2006, during the height of the housing boom. Early in 2001, when the effects of the burst dot-com boom were starting to spread throughout the economy, it wanted a rate as high as 5.5%.
According to futures contract prices for rates in the short-term market targeted by the infamously predictable Fed, an overwhelming 97% of investors anticipated the quarter-point change.
Although recent statistics indicate that inflation is significantly declining, the increase indicates that the central bank still views excessive inflation as a greater threat to the economy than an economic slowdown.
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Consumer Price Index Report
Decision comes after more than a year of, occasionally, quite aggressive rate hikes. According to the consumer price index report for June, inflation decreased to a 3% annual rate.
That is a decrease from as high as 9% last summer, when prices were being driven up by both supply-side factors, most notably rising oil prices brought on by Russia’s invasion of Ukraine, and by heated demand for goods and services fueled by high government spending and cheap interest rates.
Many economists were concerned that the Fed’s initial measures to reduce inflation through rate hikes would cause excessive business to slow down and send the economy into recession.
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