If you thought the Fed’s recent actions to bring inflation under control have been drastic, hang on tight: Two more big hikes to its benchmark interest rate are likely this summer, according to newly released details about the central bank’s last meeting.
Federal Reserve officials plan to raise the fed funds rate by 0.50 percentage point at each of their next two meetings, the same increase they announced May 4, according to meeting minutes released Wednesday. This month’s rate hike was the biggest since 2000 and brings the target range to 0.75%-1%, up from 0.25%-0.50%. The minutes confirmed what most people were already expecting regarding the next meetings, economists said, but they also showed that officials may reassess their approach later in the year and back off a bit to prevent an economic recession.
The fact that two more hefty hikes are planned shows how serious inflation has become—it’s currently running near its highest level in more than 40 years—and how determined the Fed is to get it under control. The fed funds rate influences interest rates on all kinds of loans, and the rate hikes are intended to discourage borrowing and spending, thus reducing inflation by rebalancing supply and demand. This approach, however, comes with the danger of causing a recession if it slows the economy down too much. How well the Fed will be able to walk that tightrope, and what it will do after the summer is over, remains to be seen.
note
The fed funds rate heavily influences interest rates throughout the economy, including those on credit cards and car loans, but it’s not the rate you get on those loans. Banks typically charge a set amount above their so-called prime rate. The prime rate moves in tandem with the fed funds rate, but it’s typically about 3 percentage points higher.
“The Fed will likely keep its cards closer to its chest, waiting to see how the outlook and risks unfold,” Michael Gregory, deputy chief economist at BMO said in a commentary. “That is, unless further terrible inflation developments force the Fed to lay its cards on the table.”
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