The Federal Reserve hiked interest rates dramatically again on Wednesday in an effort to combat the persistent inflation burdening the American economy.
The target range for the fed funds rate, the central bank’s benchmark lending rate between banks, was increased three-quarters of a percentage point for the fourth consecutive time, taking the rate to 3.75-4 percent, the highest level since January 2008.
Fed Chairman Jerome Powell addressed the press Wednesday to explain the decision and the outlook for the U.S. economy.
“We are moving our policy stance purposefully,” he said. “Restoring our price stability will require maintaining a restrictive stance for some time.” Powell noted that current inflation is well outpacing the Fed’s two percent goal. The labor market is also still in imbalance, with demand for workers still exceeding supply, he said.
The September consumer-price index report from the Bureau of Labor Statistics showed inflation at 8.2 percent year-over-year and 0.4 percent month-over-month. “Recent inflation data have again come in higher than expected,” Powell said.
Core inflation, which is measured by the average price of a household basket of good subtracting the more volatile components of food and energy, continued to rise in September. The food index soared and gasoline prices are not expected to decline quickly given ongoing energy-market pressures from Russia’s war in Ukraine and the OPEC bloc’s move to reduce petroleum production.
Long-term inflation expectations remain “anchored” based on household surveys, Powell said, “but that is not grounds for complacency.” The longer actual inflation continues the greater risk that high inflation expectations will become entrenched, he added. The chairman recognized that millions of Americans are struggling to afford essentials because of higher sticker prices in stores and at the pump. Powell cautioned, “it will take time, however, for the full effects of monetary restraint to be realized.”
Given the two consecutive GDP contractions in the first two quarters of this year, the U.S. economy technically has been in a recession. Powell advised that the Fed will continue to hike rates until inflation is tempered. Typically, the Fed is constrained by a tradeoff between inflation and unemployment. With the unemployment rate still at a low level despite the three past rate hikes, the Fed is not acting under that limit.
“We will stay the course until the job is done,” Powell said.