Fed deploys supersized rate hikes, ending era of easy money

The Federal Reserve on Wednesday pulled the trigger on another supersized interest rate hike, ushering in an end to easy money policies in its bid to battle the worst inflation since Ronald Reagan's presidency.

Fed officials increased rates by three-quarters of a percentage point, bringing their main policy rate to its highest level since 2019. The central bank has signaled it will raise borrowing costs further throughout the year, which would make debt more expensive than at any time since the 2008 financial crisis.

The central bank slashed rates at the beginning of the pandemic to encourage lending and boost growth as the economy entered a brief but deep recession. With its move Wednesday, it underscored its determination to remove that support for the economy. Past this point, the Fed will be taking inflation on more directly and its moves could cut into growth — and the still-healthy job market — more severely.

Already, the Fed's actions have contributed to a slowdown in the economy, raising fears that the U.S. might be tipping into recession. Manufacturing output is slowing, wage growth is decelerating and the housing market is cooling, all signs that rate hikes are starting to wend their way through the country.

The central bank's policymaking committee nodded to these trends in a statement, noting that "spending and production have softened."

This is the fourth time the central bank has raised rates this year, and the second time it has opted for a 0.75 percentage point increase, three times the standard size. The 75-basis-point hike lifted the Fed’s benchmark to a range of 2.25 percent to 2.5 percent target.

Job growth has been by far the most positive trend in the economy as the U.S. has emerged from the depths of the pandemic. The economy added a net 372,000 jobs in June, a surprisingly rapid pace given that the unemployment rate already sits at 3.6 percent. But the labor market is showing signs of cracks in the face of higher rates; wage growth is decelerating and jobless claims have reached their highest weekly level since mid-November.

Ideally, the Fed would bring down inflation without significantly hurting wage growth. But the harder the central bank hits the brakes on the economy, the more that will hurt hiring and lead to layoffs and pay cuts.