The Federal Reserve delivered yet another interest rate hike on Wednesday after a short-lived pause in the central bank’s effort to cool inflation to its 2% goal.
Fed Chairman Jerome Powell on Wednesday announced a quarter-point rate hike, bringing the federal funds rate to between 5.25% and 5.5%, the highest benchmark rate since 2001.
The resumed tightening cycle also marked the 11th increase over the past 18 months.
The quarter-percentage point hike was on par with what economists expected of Wednesday’s announcement.
Stocks surged ahead of the increase with the expectation that inflation has slowed enough for it to be the final rate hike of the year — though there’s reportedly a one-in-three chance of another increase before the end of the year.
The S&P 500 closed on Tuesday at its highest level since April 2022 while the closing bell marked a 12-day winning streak for the Dow Jones Industrial Average — its longest rally since February 2017.
Despite the positive stock run, higher rates mean Americans are in for increased costs when it comes to borrowing funds to purchase homes and cars, which will likely dampen consumer spending.
The cost of credit cards may also remain high, making it more difficult for consumers to pay off their debt.
The average credit card interest rate in the US is currently 24.24%, according to LendingTree — the highest rate since the online loan marketplace began tracking average rates in 2019.
The latest figure is up from the average credit card interest rate of 16% in March 2022, just before the Fed started its 10 consecutive hikes.
June’s job report — which beat odds and showed that the US economy added 209,000 jobs last month — was another indicator that more rate hikes are imminent as figures showed a resilient labor market with low unemployment and high wages.
Tight interest and labor market could keep wages elevated, which would force companies into raising prices to offset labor costs.
Meanwhile, US data from June released by the US Bureau of Labor Statistics revealed that the Consumer Price Index — a closely-monitored measure of inflation that tracks changes in the costs of everyday goods and services — rose 3% in June versus a year earlier.
Last month’s advance, however, was short of the 4% rise the CPI saw in May compared to the same month in 2022.
In June 2022, inflation peaked at 9.1%.
Though Powell has said that “the process of getting inflation back down to 2% has a long way to go,” the central bank’s efforts have caused inflation to cool in recent months.
The latest figures came after the Fed agreed to hold interest rates steady at 5% to 5.25% at the June meeting as a way to buy time and assess whether further rate hikes would be needed.
Though “almost all” Fed officials reportedly agreed on the pause, “some participants” wanted to move ahead with the rate hike to reach the bank’s 2% inflation goal faster.
This month, those officials got what they wanted.
Policymakers are set to meet three more times by the end of this year, in September, November and December.
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