June 2022 Fed Meeting — Fed Raises Federal Funds Rate by 75 Basis Points

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On Wednesday, the Federal Reserve Open Market Committee (FOMC) announced that it is raising the federal funds target rate by 75 basis points, lifting that range from 0.75% to 1.00% up to 1.50% to 1.75%.

In each of its last three meetings, the Fed has raised the federal funds rate, which helps control the flow of money throughout the banking system. Each of those increases has gotten progressively larger — from 25 to 50 to 75 basis points — as the FOMC tightens its monetary policy to fight inflation. June’s increase was larger than the Fed’s previous guidance had suggested, showing a greater urgency on behalf of monetary policymakers.

Recession fears, as well as the prospect of persistently elevated inflation, are casting a long shadow over the economy. Within the last week, the S&P 500 stock index slipped into bear market territory (down over 20% from its all-time high), and new data showed that inflation reached a 40-year high in May.

What happened at the June Fed meeting

Key takeaways

  • FOMC raises federal funds target rate by 75 basis points, largest since 1994
  • New SEP reflects higher inflation and federal funds rate expectations for 2022
  • Labor market remains strong, with unemployment below long-run target of 4%

FOMC raises federal funds rate by 75 basis points

After May’s Consumer Price Index (CPI) showed an 8.6% year-over-year increase in inflation, the FOMC picked up the pace with an aggressive 75-basis-point increase to the federal funds target rate. Inflation continues to adversely affect U.S. households and businesses, as skyrocketing costs like the 48.7% annual increase in the price of gasoline eat away at the value of a dollar.

During May’s meeting, Federal Reserve Chairman Jerome Powell mentioned that additional 50-basis-point increases would be on the table over the next couple of meetings, but the FOMC decided that they need to tighten their monetary policy position more quickly – and may continue at this rate in July.

“Either a 50 or 75 basis point increase seems most likely at our next meeting,” Powell said today. “We will, however, make our decisions meeting by meeting, and we will continue to communicate our thinking as clearly as we can. Our overarching focus is using our tools to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored.”

New SEP reflects higher inflation and federal funds rate expectations

At the June meeting, the FOMC released its new Summary of Economic Projections (SEP), which provides the committee’s consensus view of the economy’s trajectory.

Given increased consumer inflation expectations and additional macroeconomic data, the Fed revised its inflation expectations upwards and suggested the extent of further rate increases. “Aggregate demand is strong, supply constraints have been larger and longer lasting than anticipated, and price pressures have spread to a broad range of goods and services,” according to Powell.

June’s SEP includes a projection of 5.2% personal consumption expenditure (PCE) inflation for 2022, which is up from the 4.3% 2022 PCE forecast in March. Likewise, the median expectation among FOMC members is that the federal funds rate will reach 3.25% to 3.50% this year — another significant step up from the March forecast.

The Fed will keep tightening monetary policy to help curb demand and cool inflation back down to its long-run 2% goal, but some supply-related issues will persist regardless of new Fed policies. Shocks to global supply chains from the COVID-19 pandemic and Russia’s invasion of Ukraine have contributed significantly to elevated prices.

Labor market remains strong, with unemployment below 4%

Meanwhile, the Fed has made significant progress on their mandate to reach maximum employment. Unemployment has held steady at 3.6% from March to May, a new low since the start of the COVID-19 pandemic. As the FOMC noted in its meeting statement, “job gains have been robust in recent months, and the unemployment rate has remained low.”

With labor force participation still down since the start of the pandemic, the labor market for workers is quite strong. The relative scarcity of workers and competition among employers to fill job openings affects inflation by driving up wages. If the ratio of job seekers to job openings was more even, “you’d expect to see those wage pressures move back to a level where people are still getting healthy wage increases, real wage increases, but at a level that’s consistent with 2% inflation,” according to Powell.

As the Fed continues to tighten monetary policy in an effort to drive down inflation, it also will tamp down the demand for labor — which could consequently raise unemployment. The Committee will hope for a “soft landing” by restoring price stability without causing a significant recession or a spike in unemployment.

Fed meeting schedule in 2022

Here is the FOMC’s calendar of scheduled meetings for 2022. Each entry is tentative until confirmed at the meeting proceeding it.

January 25-26, 2022

March 15-16, 2022

May 3-4, 2022

June 14-15, 2022

July 26-27, 2022

September 20-21, 2022

November 1-2, 2022

December 13-14, 2022

Past Fed meeting coverage

Read our analysis of the previous Fed meeting:

What happened at the May Fed meeting

Key takeaways

  • FOMC raises federal funds target rate by 50 basis points, the largest rate increase since 2000
  • Chair Powell projects confidence in the U.S. economy as some red flags start to emerge
  • Inflation remains a key theme, as PCE reached a 6.6% year-over-year increase in March

Fed raises federal funds rate by 50 basis points

In response to the highest inflation rates in decades, the FOMC raised the federal funds rate by the highest amount since 2000.

“We are on a path to move our policy rate expeditiously to more normal levels,” said Powell. “Assuming that economic and financial conditions evolve in line with expectations, there is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings.”

The most recent projections from the FOMC as part of its March Summary of Economic Projections (SEP) included a wide range of forecasts for where the federal funds target rate could land by the end of 2022. The lowest forecast was 1.25% to 1.50%, with the highest forecast at 3.00% to 3.25%. The median forecast was 1.75% to 2.00%, which would require several more rate increases this year. The Fed’s next SEP will be released in June.

Chair Powell responds to recession worries and economic decline

For a while, the economic recovery during the pandemic had been going well: Unemployment steadily fell, real gross domestic product (GDP) rose and the stock market reached unprecedented highs. However, with the emergence of persistent, elevated inflation, there are signs that the U.S. economy is starting to falter.

In the first quarter of 2022, real GDP decreased at an annual rate of 1.4% — in large part due to the price increases during that time. (Two consecutive quarters with real GDP declines generally signals the start of a recession.) Several major stock indexes, including the NASDAQ, S&P 500 and Dow Jones Industrial Average entered correction territory during recent months as well, meaning that they lost at least 10% of their value.

Despite this, Powell argued that while “overall economic activity edged down in the first quarter … underlying momentum remains strong.” He cited temporary swings in inventories and net exports, but claimed that these “likely carry little signal for future growth,” also noting that “household spending and business fixed investment continue to expand briskly.” The labor market also remains strong, as unemployment fell to 3.6% in March, the lowest rate since the start of the pandemic.

Inflation stays elevated amid global supply issues

Even as the Fed has begun to tighten its accommodative pandemic-era monetary policies, inflation continues to rise. According to the Personal Consumption Expenditure (PCE) price index — a key metric used by the Fed to determine price stability — inflation has risen over several consecutive months. The most recent data shows that prices rose 6.6% in March 2022 relative to March 2021.

Since the start of the current inflationary trend, Powell has referenced supply-related disruptions due to the pandemic. Those disruptions are still affecting the global flow of goods, particularly as the Chinese government imposes lockdowns to curtail the spread of the coronavirus. Russia’s invasion of Ukraine is another crisis that has downstream effects on global energy markets in particular.

Powell noted that some of those dynamics are outside of the Fed’s control: “Our tools don’t really work on supply shocks; our tools work on demand. We can’t affect, really, oil prices or other commodity prices, or food prices and things like that. But there’s a job to do on demand.”

Since certain supply constraints seem unlikely to lift anytime soon, the Fed will strive to tamp down demand in order to control inflation.