Even after a report released earlier this month found U.S. inflation in June had dropped to 3%, the lowest annual rate in over two years, the Federal Reserve announced a .25% hike to its benchmark lending rate on Wednesday, its 11th rate increase since March 2022.
Following a decision at its June meeting to take a pause on a streak of rate hikes, the Fed’s Open Markets Committee voted unanimously to support the increase which brings the monetary body’s intra-bank overnight lending rate into the range of 5.25% to 5.5%, the highest it’s been since 2001.
While Fed Chairman Jerome Powell noted June’s Consumer Price Index data was surprisingly positive, he said other economic indicators that reflect a U.S. economy that’s still running too hot weighed more heavily in the decision to enact another rate hike. Those factors include high wage growth and consumer spending and an ongoing imbalance in the U.S. jobs sector in which unfilled positions still far outnumber workers available to fill them.
Powell also pointed to core inflation, which strips out volatile food and energy pricing, which was assessed at 4.8% in June, a rate well above the Fed’s target of 2%.
“Inflation has moderated somewhat since the middle of last year but, nonetheless, the process of getting inflation down to 2% has a long way to go,” Powell said at a press conference following the conclusion of the Fed’s two-day meeting on Wednesday.
When asked by reporters if the Fed is likely to assess another rate hike at its next meeting in September, Powell said no decision has yet been made and he and the Fed’s board members would be guided by incoming data.
“I will also say, between now and the September meeting, we get two more job reports, two more CPI reports, I think we have an (employment compensation index) report coming later this week ... lots of data on economic activity, all of that information is going to inform our decision as we go into that meeting,” Powell said. “I would say it is certainly possible that we would raise funds again at the September meeting if the data warrant it. And I would also say it’s possible that we would choose to hold steady at that meeting.”
Powell also said that staff economists at the Fed were no longer predicting a mild recession on the horizon for later in the year.
“Given the resilience of the economy recently, they are no longer forecasting a recession,” Powell said.
Before the June pause, the Federal Reserve’s Federal Open Market Committee had assessed 10 consecutive hikes to its federal funds rate, raising the interest some 500 basis points from the near zero mark it was at in March 2022.
Interest rate adjustments are the Fed’s primary weapon in an ongoing battle against the elevated prices of consumer goods and services and represents the monetary body’s most aggressive series of increases in decades.
The rate hikes aim to raise the cost of debt for businesses and consumers, which should, theoretically, reduce the amount of spending and overall economic activity, a shift in dynamics that typically brings inflation rates down.
June’s Consumer Price Index rose .2% from the previous month, mostly driven by increases in the average cost of shelter, which is up 7.8% in the last year. Last month, overall inflation hit its lowest annual rate since March 2021 and has been on a steady decline after hitting a 40-year-high of 9.1% in June 2022.
Grocery prices were up 4.7% in June from this time last year and food at restaurants was 7.7% more expensive while overall energy costs fell by 16.7%. The average cost of a new vehicle in the U.S. was up by 4.1% in June but used car prices dropped 5.2% over the last 12 months.
Utah is among Mountain West states that have experienced some of the highest inflation rates in the nation and that continued in June, with overall annual inflation coming in at 3.7%, second only to South Atlantic states that had a year-over-year rate of 3.8%.