The Federal Reserve revealed a 75 basis point rate hike, indicating weak economic data

WASHINGTON, July 27 (Reuters) – The Federal Reserve raised its benchmark overnight interest rate on Wednesday by three-quarters of a percentage point in an effort to quell the biggest breakout in inflation since the 1980s, with “continuing increases” in borrowing costs. We still have evidence of a slowing economy.

“Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising food and energy prices, and broader price pressures,” the Federal Open Market Committee (FOMC) said, raising the policy rate to a consensus range of 2.25% to 2.50%.

The FOMC added that it remains “extremely cautious” about inflation risks.

But while job gains remained “robust,” officials noted in the new policy statement that “recent indicators of spending and production have waned,” a reference to the fact that the large interest rate increases they’ve imposed since March are beginning to pay off. .

With a 75 basis point rise last month and smaller moves in May and March, the Fed raised its policy rate by a total of 225 basis points this year as it struggles to break through 1980s-level inflation with its 1980s-style monetary policy.

The rate of policy is now at a level that most Fed officials feel has a neutral economic impact, in effect marking the end of pandemic-era efforts to encourage spending by households and businesses with cheap money. The rate also coincides with the highest point in the central bank’s previous tightening cycle from late 2015 to late 2018, a level reached this time in just a four-month period.

The latest policy statement gave little clear guidance on what steps the Fed might take next, a decision that will depend heavily on whether upcoming data shows inflation is starting to slow.

With the latest data showing consumer prices rising at more than a 9% annual rate, investors expect the US central bank to raise interest rates by at least half a percentage point at its September meeting.

From here, the Fed is likely to slow its hawkish pace, reassuring of potential inflation peaks and waning inflation expectations with lower oil prices,” Seema Shah, chief global strategist at Principal Global Investors, said in a note. “However, with the labor market continuing to strengthen, wage growth still uncomfortably high, and core inflation expected to decline at a very slow pace, the Fed certainly cannot stop tightening, and it cannot change gears much.”

Fed Chairman Jerome Powell is likely to provide more details at a press conference scheduled to begin at 2:30 PM ET (1830 GMT).

In the US Treasury market, which plays a major role in transmitting the Fed’s policy decisions to the real economy, yields changed little with the Fed’s announcement, with the yield on the 10-year bond falling by 2 basis points per day and the yield on the two-year bond unchanged.

Stocks on Wall Street maintained broad gains in the session, while the dollar fell against a basket of currencies of major trading partners.

(Howard Schneider reports). Editing by Dan Burns and Paul Simao

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