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Fed unveils 75-basis-point rate hike, weakening economic data

Fed unveils 75-basis-point rate hike, weakening economic data
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  • The Fed raised policy rates to a range of 2.25%-2.50%
  • The US central bank flags weak economic data
  • The Fed’s Powell will speak at 2:30 pm EDT (1830 GMT).

WASHINGTON, July 27 (Reuters) – The Federal Reserve raised its benchmark overnight interest rate by three-quarters of a percent on Wednesday in an effort to cool the sharpest breakout of inflation since the 1980s, despite evidence of a sluggish economy with “continued increases” in borrowing costs.

“Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, higher food and fuel prices and broader price pressures,” the rate-setting Federal Open Market Committee said as it raised policy rates to a range of 2.25% and up. 2.50% by unanimous vote.

The FOMC added that it remains “extremely focused” on inflation risks.

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But job gains remain “strong,” officials noted in the new policy statement as “recent indicators of spending and output have softened,” a nod to the fact that the aggressive rate hikes they’ve had since March are starting to bite. .

On top of a 75-basis-point hike last month and smaller moves in May and March, the Fed has raised its policy rate by a total of 225 basis points this year as it battles inflation with a breakout from 1980s-style monetary policy.

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Policy rates are now at levels that most Fed officials believe have a neutral economic impact, marking the end of pandemic-era efforts to spur household and business spending with cheap money. The rate also matched the high point of the central bank’s previous tightening cycle from late 2015 to late 2018, reaching this point in just four months.

The latest policy statement gave little clear guidance on what the Fed might do next, a decision that will depend on whether upcoming data shows inflation slowing.

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

Seema Shah, chief global strategist at Principal Global Investors, said in a note, “From here, it is possible that the Fed eases its pace of tightening, reassured by a possible peak in inflation and a rebound in inflation expectations.” “However, with the labor market still a strong picture, wage growth still uncomfortably high and core inflation continuing to decline at a glacially slow pace, the Fed certainly cannot stop tightening, nor can it lower the gears too much.”

Fed Chair Jerome Powell will likely provide more details at a news conference starting at 2:30 pm EDT (1830 GMT).

In the US Treasury market, which plays a key role in transmitting the Fed’s policy decisions to the real economy, yields were little changed by the Fed’s announcement, with yields on the 10-year note down 2 basis points on the day and yields on the 2-year note unchanged.

Wall Street stocks held broad gains in the session, while the dollar edged lower against a basket of major trading partners.

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Reporting by Howard Snyder; Editing by Dan Barnes and Paul Simao

Our values: Thomson Reuters Trust Policy.

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