Fed announces highest rate hike in 14 years

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WASHINGTON (NewsNation) — As the fear of a recession looms, Federal Reserve Chair Jerome Powell vowed on Wednesday that the Federal Reserve would “keep at” its battle to beat down inflation.

“If we want to light the way to another period of a very strong labor market,” Powell said, “We have got to get inflation behind us. I wish there was painless way to do that. There isn’t.”

Fed officials have said they are seeking a “soft landing,” by which they would manage to slow growth enough to tame inflation but not so much as to trigger a recession. Yet most economists are skeptical. They say they think the Fed’s steep rate hikes will lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.

The Federal Reserve announced another three-quarter point interest rate hike Wednesday to intensify its fight against chronically high inflation. This is the highest level it’s been in 14 years, and the fifth time rates have increased this year.

With the increase, the Fed’s benchmark short-term rate, which affects many consumer and business loans, now will be in a range of 3% to 3.25%. Policymakers signaled that they expect to have further raised rates much higher than they had projected in June by early 2023.

Ahead of the Federal Reserve’s announcement, stocks rose in afternoon trading on Wall Street.

The S&P 500 rose 0.6% as of 12:50 p.m. Eastern. The Dow Jones Industrial Average rose 147 points, or 0.5%, to 30,851 and the Nasdaq rose 0.6%.

Steady rate increases have made it increasingly costly for consumers and businesses to borrow — for homes, autos and other purchases. And more hikes are almost surely coming. Fed officials are expected to signal Wednesday that their benchmark rate could reach as high as 4.5% by early next year.

So, why is the Federal Reserve doing this?

This is the one tool in the Fed’s toolbox to address inflation and to bring the prices of everything down. The economics behind this, in a nutshell, are that if interest rates increase, Americans will stop spending, and if they stop spending, demand for most items will fall. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.

When demand falls, generally, so do prices. Expectations for the Fed to raise rates increased in the past week after the August consumer price index report was released. The CPI rose 0.1% in August.

However, the Fed’s move could turn out to be a double-edged sword if it continues to increase interest rates. Many economists say they fear that a recession is inevitable in the coming months — and with it, job losses that could cause hardship for households already hurt worst by inflation.

The Associated Press contributed to this story.

Reuters contributed to this story.

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