WASHINGTON (BLOOMBERG, REUTERS) – The United States Federal Reserve on Wednesday (June 15) raised interest rates by 75 basis points - the biggest increase since 1994 - and chairman Jerome Powell signalled another big move next month, intensifying a fight to contain rampant inflation.

Slammed by critics for not anticipating the fastest price gains in four decades and then for being too slow to respond, Mr Powell and colleagues on Wednesday intensified their effort to cool prices by lifting the target range for the federal funds rate to 1.5 per cent to 1.75 per cent.

He said another 75-basis point hike, or a 50-basis point move, was likely at the next meeting of policymakers.

The Fed forecast that interest rates would rise even further this year, to 3.4 per cent by December and 3.8 per cent by the end of 2023. This was a big upgrade from the 1.9 per cent and 2.8 per cent that officials pencilled in for their March projections.

“Clearly, today’s 75-basis point increase is an unusually large one and I do not expect moves of this size to be common,” Mr Powell told a post-meeting press conference. His remarks that were cheered in financial markets as he took the risk of a string of super-sized increases off the table.

Stocks climbed, halting a five-day rout that took 10 per cent off the S&P 500, while Treasury yields tumbled and the dollar pushed lower. Economists at Barclays said they expected the Fed would raise rates by only a half point next month.

The Fed’s hawkish commitment to controlling inflation has already touched off a broad tightening of credit conditions being felt in US housing and stock markets, and is likely to slow demand throughout the economy – the Fed’s intent.

“We don’t seek to put people out of work,” Mr Powell said, adding that the central bank was “not trying to induce a recession”.

Yet the Fed chief’s remarks were among his most sobering yet about the challenge he and his fellow policymakers face in lowering inflation from its current 40-year high to a level closer to its 2 per cent target, without a sharp slowdown in economic growth or a steep rise in unemployment.

“Our objective really is to bring inflation down to 2 per cent while the labour market remains strong... What is becoming more clear is that many factors that we don’t control are going to play a very significant role in deciding whether that is possible or not,” Mr Powell said, citing the war in Ukraine and global supply concerns.

“There is a path for us to get there... It is not getting easier. It is getting more challenging,” he told reporters, noting that the rate hikes announced last month and in March so far had not only failed to slow inflation, but also allowed it to continue accelerating to a level that recent data indicated had begun to influence public attitudes in a way that could make the Fed’s job even harder.

‘Eye-catching inflation’

Late last week, a survey from the University of Michigan showed consumer inflation expectations pushing higher. Respondents anticipated inflation rising 5.4 per cent in the year ahead, the highest since 1981. Longer-term price expectations also picked up.

The preliminary June readings were “quite eye-catching and we noticed that”, Mr Powell noted.

“One of the factors in our deciding to move ahead with 75 basis points today was what we saw in inflation expectations,” he said. This was in addition to the hotter-than-expected rise in the consumer price index for May released on Friday.

Bloomberg economists said: “The most notable change in the policy statement is the omission of the phrase 'the committee expects inflation to return to its 2 per cent objective'. That suggests the FOMC (Federal Open Market Committee) sees price pressures persisting, and has grown more alarmed about the potential unmooring of inflation expectations.”

Interest rate futures markets reflected about an 85 per cent probability that the Fed will raise rates by 75 basis points at its next policy meeting in July. For September’s meeting, however, the greater probability – at more than 50 per cent – was for a 50-basis point increase.

Mr Powell, departing from the firmer guidance he had previously given about future rate increases, made no promises on Wednesday.

Given an unexpected jump in a monthly inflation report on Friday and the jump as well in expectations, “75 basis points seemed like the right thing to do at this meeting, and that is what we did”, he said.

But he said rate hikes of that size were not likely to “be common” and that when Fed policymakers gather in July, an increase of either half a percentage point or three-quarters of a point would be “most likely”.

Not a 'Volcker moment'

The Fed also revised its outlook for the US economy from the soft-landing scenario of March to a bumpier touchdown. It significantly cut its outlook for 2022 economic growth, now anticipating just a 1.7 per cent gain in gross domestic product, down from 2.8 per cent from March.

While no Fed policymaker projected an outright recession, the range of economic growth forecasts edged towards zero in 2023 - with an index of Fed opinion showing officials almost unanimous in thinking risks were for growth to be slower, and inflation and unemployment higher, than expected.

Analysts, many of them critical of Fed projections in March that saw inflation easing with modest rate hikes and no increase in the unemployment rate, said the new outlook was more realistic.

“The Fed is willing to let the unemployment rate rise and risk a recession as collateral damage to get inflation back down. This is not a Volcker moment for Powell given the magnitude of the hike, but he is like a mini-me version of Volcker with this move,” said Mr Brian Jacobsen, senior investment strategist at Allspring Global Investments, referring to former Fed chairman Paul Volcker, whose battle with inflation in the early 1980s involved sharp and unexpected rate increases of as much as 4 percentage points at a time.

Even with the more aggressive interest rate measures taken on Wednesday, policymakers nevertheless see inflation, as measured by the personal consumption expenditures price index, at 5.2 per cent this year and slowing only gradually to 2.2 per cent in 2024.

The FOMC vote, which included newly sworn-in governors Lisa Cook and Philip Jefferson, included a dissent from Kansas City Fed president Esther George, who preferred a half-point increase.

Mr Powell will testify over two days next week before Congress, where he can expect to be challenged over his central bank’s performance.

Having spent most of 2021 predicting that the post-pandemic inflation surge would ease, policymakers have been repeatedly forced to rethink how high they expect to raise rates, sending financial markets into spasm as investors adjust to the risk of recession.

Recent data showed household spending and business spending had largely held up, though a retail sales report earlier on Wednesday suggested demand moderated in May.

But persistent hot inflation poses a major political problem for US President Joe Biden and Democrats who are defending their thin congressional majorities in November’s mid-term elections.