EXPLAINED: Could US Federal rate curb inflation?

The Federal Reserve on Wednesday raised its benchmark interest rate by hefty three-quarters of a point for a second straight time in its most aggressive drive in three decades to tame high inflation.

The Fed's move will raise its key rate, which affects many consumer and business loans, to a range of 2.25% to 2.5%, its highest level since 2018.

"I think a lot of the markets right now aren't really responding to much of anything," says Krieg Tidemann, assistant professor of Economics at Niagara University.

The central bank's decision follows a jump in inflation to 9.1%, the fastest annual rate in 41 years, and reflects its strenuous efforts to slow price gains across the economy.

By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.

The Fed is tightening credit even while the economy has begun to weaken, thereby heightening the risk that its rate hikes will cause a recession later this year or next.

Chair Jerome Powell suggested Wednesday at a news conference that the Fed's rate hikes have already had some success in slowing the economy and possibly easing inflationary pressures.

That message, with its implication that the Fed may not have to raise rates so aggressively in the coming months, helped ignite a powerful rally on Wall Street. The Dow Jones industrial average closed up 436 points.

Still, the surge in inflation and fear of a recession have eroded consumer confidence and stirred public anxiety about the economy, which is sending frustratingly mixed signals. And with the November midterm elections nearing, Americans' discontent has diminished President Joe Biden's public approval ratings and increased the likelihood that the Democrats will lose control of the House and Senate.

The Fed's moves to sharply tighten credit have torpedoed the housing market, which is especially sensitive to interest rate changes. The average rate on a 30-year fixed mortgage has roughly doubled in the past year, to 5.5%, and home sales have tumbled.

Consumers are showing signs of cutting spending in the face of high prices. And business surveys suggest that sales are slowing.

The central bank is betting that it can slow growth just enough to tame inflation yet not so much as to trigger a recession — a risk that many analysts fear may end badly.

At his news conference, Powell suggested that with the economy slowing, demand for workers easing modestly and wage growth possibly peaking, the economy is evolving in a way that should help reduce inflation.