The Federal Reserve’s Federal Open Market Committee (FOMC) today announced an increase of 75 basis points to the target federal funds rate, raising the rate to 1.75% from 1%. June’s meeting today was the third meeting this year at which the FOMC has raised rates. Coming into the March meeting this year, however, the FOMC had not raised the target rate since March of 2020, even though price inflation began to accelerate during the second half of 2021.
Today’s 75-basis-point increase is the largest increase since late 1994 when the FOMC raised the target rate from 4.75% to 5.5%.
Notably, however, this increase comes mere weeks after the Fed Chair Powell slapped down the idea of a 75-basis point increase in June. As reported by Reuters on May 4, Powell had insisted “A 75 basis point increase is not something that the committee is actively considering.”
That didn’t last long.
The fact that the Fed was forced to hike the target rate by higher than it had suggested was even possible earlier in the year is a reminder that the Fed and its economists are simply in a reactionary mode when it comes to the US economy’s problem with mounting price inflation.
As even Powell admitted during today’s press conference, the Fed was surprised by how high price inflation has grown. The Fed then had to pivot in order to answer calls that the central bank “do something” about price inflation.
But when it comes to the Fed’s decisions about setting target rates, it is I increasingly obvious there is no model. The “plan,” to the extent one exists at all, amounts to “let’s see how bad inflation is, and then we’ll pick a target rate and hope that solves the problem.”
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