The Federal Reserve’s monetary policy committee approved a 75-basis point increase for the federal funds target rate, the largest increase for the funds rate since 1994. The latest increase follows a 25-basis point increase in March and a 50-basis point increase in May. The Federal Open Market Committee noted ongoing elevated levels of inflation, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures are still present in the economy despite “robust” job gains and low unemployment rates.
“The latest inflation read told the Federal Reserve one thing: Americans are still hurting,” says Zonda chief economist Ali Wolf. “Inflation is at the highest level in 40 years and is elevated in parts of the economy that consumers feel almost daily, from higher gas prices to rising food and shelter costs.”
According to the committee, the invasion of Ukraine by Russia is “causing tremendous human and economic hardship,” putting an additional upward pressure on inflation. Supply chains continued to be impacted by pandemic-related lockdowns in China, according to the Federal Reserve.
The announcement lifts the Federal Reserve’s benchmark Federal Funds Rate by 0.75% to a target range of between 1.5% and 1.75%. The Federal Open Market Committee anticipates “ongoing increases in the target range will be appropriate." The committee seeks to achieve maximum employment and inflation at a long-run rate of 2%.
“A healthy economy should have an annual inflation rate averaging 2% versus the 6% to 8% level we are seeing today,” says Wolf. “Policymakers at the Federal Reserve realized that they need to tamp down on inflation aggressively, which is why we saw a 75-basis point increase in June. The lingering fear among industry experts, however, is the question of whether the Federal Reserve can cool the economy without accidentally pushing it into a recession.”
NAHB chief economist Rob Dietz says the committee’s plan to reduce its balance sheet, including net reduction of $35 billion of mortgage-backed securities a month, is a “positive element of today’s news for housing.” Dietz says the risk of a planned faster pace would further increase mortgage interest rates, which are already averaging above 5%.
