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July 2022 Fed Meeting — Fed Raises Federal Funds Rate Another 75 Basis Points

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The Federal Reserve Open Market Committee (FOMC) announced yesterday it is once again raising the federal funds target rate by 75 basis points, making the current rate 2.25% to 2.50%. With June’s Consumer Price Index (CPI) showing a 9.1% year-over-year price increase, it’s no surprise that for the second meeting in a row, the FOMC made big moves in the fight against inflation.

The energy sector contributed the most to inflation in June, and falling gas prices in July could be an early sign that inflation is starting to cool. However, global supply chain pressures remain historically high and consumers keep spending –– driving prices up and keeping everyone on their toes about a possible recession.

What happened at the July Fed meeting

Key takeaways

  • FOMC raises federal funds target rate by 75 basis points
  • Americans are bracing for a possible recession
  • Strong labor market signals economic resilience

FOMC raises federal funds rate by another 75 basis points

The FOMC made another 75-basis-point increase to the federal funds target rate, lifting it to well above 2%. It’s the fourth rate increase this year, and will likely lead banks to continue raising interest rates on credit cards, mortgages, deposit accounts and other financial products.

When asked about the risks of too much tightening, Federal Reserve Chair Jerome Powell acknowledged the possibility that the Fed could engineer an economic downturn.

“But the risk of doing too little and leaving the economy with this entrenched inflation, it only raises the costs,” he said. “If you fail to deal with it in the near term, it only raises the cost of dealing with it later.”

Powell added there will probably be further significant tightening.

Americans are bracing for a possible recession

A few major economic indicators point toward an imminent recession. In the first and second quarters of 2022, real gross domestic product (GDP) declined — according to some experts, two consecutive quarters of real GDP decline define a recession.

The bond market yield curve is another recession indicator. An inverted yield curve (in which short-term bonds become more valuable than long-term bonds) has preceded the last six recessions. Currently, the yield on two-year Treasury notes is higher than the yield on ten-year Treasury notes.

In the midst of this economic tension, longer-term consumer inflation expectations decreased from 3.10% in June to 2.80% in July. Consumer sentiment and confidence remain low in the face of this possible recession — at the same time, July’s lower gas prices could serve as a hopeful sign.

Strong labor market signals economic resilience

Ultimately, Powell doesn’t consider the U.S. economy to be in a recession — even stating that “we’re not trying to have a recession” — citing stats like the low 3.6% unemployment rate.

“We think that there’s a path for us to be able to bring inflation down while sustaining a strong labor market, along with, in all likelihood, some softening in labor market conditions,” the chair added.

We’ll see more real GDP, inflation and unemployment data in the coming weeks. The Fed will also release their next Summary of Economic Projections (SEP) — which provides the committee’s consensus view of the economy’s trajectory — in September.

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 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.