The Federal Reserve Federal Open Market Committee last week announced an increase of 75 basis points to the federal funds rate to 2.25-2.5 percent. This is the second time in as many months that the Fed has increased interest rates by 75 basis points.
The current rate is what most economists and Fed officials regard as having a “neutral economic impact,” indicating the end of pandemic-era efforts to increase household and business spending.
Fed Chair Jerome Powell indicated in the press conference following the FOMC meeting that there would likely be a slowing or pause in the rate hikes as the Fed assesses the cumulative affects of the rate increase done thus far.
“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said.
The Fed’s latest rate increase comes at the same time the Bureau of Economic Analysis confirmed that the U.S. gross domestic product (GDP) declined by 0.9 percent for the quarter running from April to June. Following first quarter’s 1.6 percent decline in GDP, this marks the second consecutive GDP decline this year, which economists often regarded as one of the signs of a recession.
The other major indicator of a recession, high unemployment, has not seemed to manifest even as the economy is slowing down. Unemployment claims for the week ending July 23 were down 5,000 from the previous week.
Powell countered the notion the economy is currently in a recession, even with negative growth for two consecutive quarters.
“Think about what a recession is. It’s a broad-based decline across many industries that’s sustained more than a couple of months. This doesn’t seem like that now,” he said. “The real reason is the labor market has been such a strong signal of economic strength that it makes you question the GDP data.”
Officially, the National Bureau of Economic Research declares recessions and expansions and is not likely to make such a judgment for several months.