The Federal Reserve announced on Wednesday that it raised interest rates by 75 basis points for the second straight month in an effort to help slow inflation.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” the Fed said in a press release. “In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate.
The Fed also noted that “recent indicators of spending and production have softened” but added, “job gains have been robust in recent months, and the unemployment rate has remained low.”
It also claimed that Russia’s war in Ukraine is partly to blame for the ongoing economic woes.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the group noted. “Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”
While the Fed may say that Russia’s war is to blame, Federal Reserve Chairman Jerome Powell has previously testified that “inflation was high before, certainly before the war in Ukraine broke out” and that the violence wasn’t the main driver of inflation.
The move comes as the Consumer Price Index (CPI) reported in July that inflation increased 9.1% between June 2021 and June 2022.
In June, the Fed also hiked interest rates by 0.75% — which was then the boldest action since 1994 — after inflation rose 8.6% in May.
The central bank had already increased rates by 0.5% in May — the largest increase since 2000 — after a 0.25% rate hike from near-zero levels in March.
Powell has previously said that his team had failed to see inflation coming because they were using outdated models to forecast the economy.
During the European Central Bank forum, host Francine Laqua asked panelists, “Hindsight is a beautiful thing, I know…but going forward…how do we need to look at inflation differently? So, for example, in the U.S. — the stimulus. Did we circulate the impact this would have on inflation?”
“I think we now understand better how little we understand about inflation,” Powell responded.
The Bloomberg TV anchor responded with a chuckle, “That’s not very reassuring.”
“No, honestly, this was unpredicted. I was looking at the time of our June meeting one year ago, of the 35 people who filed with a survey of professional forecasters, 34 of them had inflation below four percent for the last year. And of course, it was way above four percent.”
“So really, everyone had the same model — which was the Phillips curvemodel — and it just was not capable of producing high inflation,” he added. “But what it was missing was something that’s been completely missing in the data for 40 years, which is basically the collapse of the supply-side.”
A portion of the exchange can be seen here: