- The Fed just raised interest rates by 0.5 percentage points, and it will likely do so again soon.
- There's a "broad sense" that such hikes "should be on the table" at coming meetings, chair Jerome Powell said.
- The double-sized increase represents the Fed's more aggressive strategy for cooling inflation.
The Federal Reserve on Wednesday issued its first double-sized rate hike since 2000. It probably won't be the last one this year.
The central bank lifted its benchmark interest rate to a range of 0.75% to 1%, up 0.5 percentage points from the previous range's limits. The increase was twice the size of the quarter-point rate hikes typically used by the Fed and reflect a markedly more aggressive policy strategy to cool inflation.
The larger-than-usual hikes suggest the Federal Open Market Committee is betting the economy needs less in the way of pandemic-era support and a more stringent effort to slow the country's months-long price surge.
One double-sized rate increase won't be enough to quell inflation, however, and Fed Chair Jerome Powell hinted in a Wednesday press conference that such large hikes could dominate the Fed's summer meetings.
"There is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings," Powell told reporters. "The American economy is very strong and well-positioned to handle tighter monetary policy."
The faster hiking cycle will primarily fight inflation by weakening demand. A higher benchmark rate lifts rates on all kinds of borrowing, ranging from mortgages to credit card interest. Pricier borrowing tends to rein in Americans' spending. A spending cooldown would help close the supply-demand gap that's powered inflation higher.
But while Powell confirmed that 0.5-point hikes are being considered, he doesn't see the Fed backing a larger increase anytime soon. A 0.75-point hike "is not something that the committee is actively considering," he said.
The forward guidance confirms what markets have been betting on for weeks. Traders are largely pricing in 0.5-point hikes to be announced at the FOMC's June and July meetings. Forecasts for the September policy decision are much more varied but still point to another double-sized increase. That would place the upper limit of the benchmark interest rate at 2.5%, sharply higher than the 0.25% limit seen as recently as early March.
Such a high rate would make borrowing much more expensive and leave Americans feeling new pressure from their loans. The alternative, however, would be more dangerous for the economy, Powell said. There "may be some pain" as the Fed raises rates at a faster clip, but the "big pain" would come from "not dealing with inflation and allowing it to become entrenched," he added.
Whether Powell is correct and the economy can withstand a more aggressive hiking cycle is possibly the hottest debate surrounding the US economy. The discourse focuses on the goal of a "soft landing," a phrase that characterizes the Fed's ability to slow inflation without facing a drop in employment.
The central bank has a "good chance" at achieving a "soft or soft-ish landing" through the recovery, Powell said Wednesday, cited the labor market's swift recovery and strong economic data as a sign the US can stomach higher rates.
Yet hawkish economists have pushed back against Powell's outlook in recent months, arguing the Fed moved too late to address the inflation problem. Deutsche Bank projected in April that the Fed would raise rates above 5% and trigger a major recession by the end of 2023.
JPMorgan CEO Jamie Dimon said Wednesday he sees a one-in-three chance the Fed can accomplish a soft landing, and a similar probability the country plunges into a severe recession. Still, the economy remains "very strong" and the Fed is right to move faster, he added.
"We're a little late, but remember two years ago we had 15% unemployment and no vaccine," Dimon told Bloomberg TV. "People should take a deep breath and give them a chance."