Fed Hikes Interest Rates by 75 Basis Points in June 2022 – Biggest Increase Since 1994

In a decisive move to combat soaring inflation, the Federal Reserve implemented its largest interest rate increase since 1994, raising the Federal Funds rate by 75 basis points to a new range of 1.5% to 1.75% during the June 14-15, 2022 Federal Open Market Committee (FOMC) meeting.

This aggressive hike capped the Fed's two-day policy session, reflecting the central bank's commitment to reining in inflation pressures that have surged to a 40-year high. The Consumer Price Index (CPI) inflation rate reached 8.6% in May, surpassing the previous peak of 8.5% recorded in March, signaling that inflation has yet to peak and necessitating stronger monetary tightening.

Highlights of the June 2022 Rate Increase

• The FOMC voted nearly unanimously to raise rates by 75 basis points, with only one dissenting vote advocating a smaller 50 basis point increase.
• Inflation at multi-decade highs was the primary driver behind this significant rate adjustment.
• Federal Reserve officials now forecast the Federal Funds rate to reach 3.4% by the end of 2022, a sharp increase from the 1.9% projection made earlier in March.

Context: Recent Rate Hikes

After maintaining record-low rates throughout 2020 and 2021 to support the economy during the COVID-19 pandemic, the Fed initiated its rate hikes in 2022 with a 25 basis point increase in March, followed by a 50 basis point rise in May. Persistent inflationary pressures led markets to anticipate the substantial 75 basis point hike in June, a forecast supported by the CME Group’s FedWatch Tool indicating a 90% probability prior to the meeting.

Voting and Future Outlook

The June rate hike was nearly unanimous, with Kansas City Fed President Esther George casting the sole dissenting vote favoring a smaller increase. Looking ahead, the Fed signals continued aggressive rate hikes, with 50 basis point increases expected in July and September meetings. Chair Jerome Powell emphasized the central bank’s unwavering focus on curbing inflation.

Projections now place the year-end Federal Funds rate at 3.4%, with a long-term rate forecast of 3.8%—levels not seen since 2007. Meanwhile, economic growth expectations for 2022 have been revised downward to 1.7%, reflecting the tightening monetary policy and inflation challenges.

Despite these challenges, the Fed remains cautiously optimistic that inflation will ease to approximately 2.6% in 2023, aligning closer to their long-term target. However, officials remain prepared to adjust policies as needed to respond to evolving economic conditions.

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