Fed Raises Rates by 75 Basis Points at June FOMC Meeting

On Wednesday, the Federal Open Market Committee (FOMC) voted to raise its benchmark Federal Funds rate by 75 basis points (bps) to a range of 1.5% to 1.75%, its largest rate hike for a single meeting dating back to 1994. The interest rate decision capped off the Federal Reserve’s two-day June policy meeting, where the U.S. central bank was widely expected to raise interest rates.

The Federal Reserve has decisively pivoted its policy stance in recent months to address rising inflation. Consumer Price Index (CPI) inflation accelerated to a new 40-year high of 8.6% in May, surpassing the previous high of 8.5% set in March. The latest reading indicated that inflation rates have not yet peaked, with more aggressive action by the Federal Reserve required to tame surging inflation. The current rate of 8.6% is more than four times the Fed’s long-run inflation target of 2%.

Previous Rate Hikes

After holding its benchmark Federal Funds rate at record low levels throughout 2020 and 2021, in response to the economic effects of the COVID-19 pandemic, the Fed conducted its first rate hike since December of 2018 in March. The initial 25-bp hike in March was followed by a 50-bp increase in May, after price pressures showed no sign of peaking. 

Expectations for a rate hike of 75 bps rose in the days leading up to the June FOMC meeting, as the CME Group’s FedWatch Tool showed a 90% probability of 75-bp increase early in the week. Markets adjusted their expectations following the Bureau of Labor Statistics’ inflation report tracking consumer prices.

Near-Unanimous Vote

The decision to raise rates by three-quarters of a percentage point was nearly unanimous, with the sole opposing vote coming from Kansas City Fed President Esther George, who preferred a smaller 50 basis point increase.

Expectations for Future Meetings

For the remainder of the year, the Federal Reserve is expected to continue with an aggressive rate-setting agenda, with 50 basis point hikes expected at upcoming meetings in July and September. Fed Chair Jerome Powell has reiterated that combatting high levels of inflation remains a top priority for the U.S. central bank.

Federal Reserve officials are now projecting a year-end Federal Funds rate of 3.4%, substantially higher than initial projections of 1.9% made in March. Looking ahead past 2022, the Fed forecasts a long-run rate of 3.8%, which would mark the highest level dating back to 2007. Meanwhile, the nation’s central bank drastically lowered its growth outlook for the U.S. economy in 2022, to a projected growth rate of 1.7% compared to initial estimates of 2.8% in March.

In its long-run inflation outlook, the FOMC was more optimistic, expecting headline inflation to subside to 2.6% in 2023, with a corresponding core inflation rate of 2.7%. These projections were little changed from March.

However, Fed officials added that the central bank may need to remain nimble to adapt policy to changing conditions. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge,” as noted in a release.