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Federal Reserve raises interest rates by 75 basis points

Yahoo Finance reporter Brian Cheung breaks down the Federal Reserve's latest rate hike and what the central bank may do going forward as they combat inflation.

Video Transcript

DAVID BRIGGS: Brian Cheung is outside the Fed awaiting the decision from Jerome Powell, which we expect, Brian, a 75-point hike.

BRIAN CHEUNG: Yes, Dave. Well, the Federal Reserve just making that announcement. The Federal Reserve has officially raised interest rates by 0.75%. That was largely as expected. Again, markets pricing in a chance of-- about 75% chance of that happening.

Now, when it comes to changes to the statement itself, really not much change when you talk about "recent indicators of spending and production have softened." That's the only new sentence in the statement. Again, I'll read that one more time. "Recent indicators of spending and production have softened." That might be the closest that we'll get to the Federal Reserve acknowledging that, perhaps, there is a slowdown happening in the economy, not en masse, but interesting to note that language is in the statement.

But beyond that, really nothing else in here. The Fed continuing to point to Russia's war against Ukraine as one element to upward price pressures. Of course, the Fed sees a demand side of that as also part of the picture, which is the reason why it feels it has to continue to raise interest rates. Keep in mind, the Fed is now targeting interest rates between 2 and 1/4% and 2 and 1/2%. And they say, quote, "they anticipate that ongoing increases in the target range will be appropriate."

Translation-- bus doesn't stop here. That language was the same as we had seen from the Fed in June. But beyond that, the Fed continuing to acknowledge food and energy prices are high. Job gains do remain robust, so the Fed's balancing act as it tries to raise interest rates without triggering any sort of job losses does remain. But again, the big headline today-- 0.75 percentage point increase from the Fed, second in a row. Decision was unanimous. Guys.

SEANA SMITH: Brian, just talk to us about the unprecedented action here from the Fed. It's been quite some time since we've seen the Fed get so aggressive. And then, of course, just your perspective on what this means that we will likely see heading into the fall because inflation's still at its highest level that we've seen in about 40 years.

BRIAN CHEUNG: Yeah, well, when we talk about just the inflationary reaction, we have to remember that the Federal Reserve has been pretty insistent that it can't just simply stop raising interest rates here. For what it's worth, where we're at right now at about 2.25% to 2.5% is roughly the estimate of where economists say is neutral, meaning that any further interest rate hikes past this point could have more bite into inflation, which is going to be very important when you consider that the last three we got on inflation on CPI was 9.1% on a year-over-year basis. That hasn't shown signs of letting up quite yet.

However, what we don't know is what is the Federal Reserve going to do next? There's nothing in this statement that says, well, in the next meeting, which, by the way, is going to happen at the end of September, is it going to be 50 or 75 or 1 percentage point? We don't know, and that's why all eyes are going to be on the Fed's-- Fed chairman's press conference at 2:30. What will Jay Powell tell us? Will he give us guidance on what happens next? That's going to be very important to see how he can shape inflation expectations with these recessionary worries out there.

RACHELLE AKUFFO: And we know that before when we got that CPI data that came out, people were wondering, look, could it be 100 basis points? But obviously closer to this decision, we did see that 10%. But it's interesting to see that this was a unanimous decision. Was that surprising to you?

BRIAN CHEUNG: Well, it was surprising when you consider that you actually had one member dissenting from the last decision. So in June when the Fed made the abrupt change last minute to go from 50 basis points to 75 basis points, you actually saw Esther George, the president of the Federal Reserve Bank of Kansas City, dissent against that. She wanted a smaller rate hike of the 0.5-- half a percentage point that markets were expecting prior to that meeting, which, by the way, was a bit of a surprise because those Fed watchers have noted for some time that she has tended to favor larger interest rate increases as opposed to smaller ones.

But in this decision, which, by the way, she's still a voter, she did go along with what the Federal Reserve ultimately went with, which was that 3/4 of a percentage point increase. So again, everyone's on board. Keep in mind, we also have a few new members of the Federal Reserve Board. Michael S. Barr and then also Susan Collins from the Boston Fed joining the committee between June and July. So they were also in line when it comes to that. Of course, we'll have to hear all the Fed commentary after this meeting to see if the other nonvoting members of the committee also supported this decision.

DAVID BRIGGS: Yeah, really surprising of the amount, Brian, of business leaders and analysts who wanted a 100-point hike. So I expect the name Janet Yellen to pop up in this press conference, in particular when defining a recession. How do you expect the Fed chair to tap dance around the actual definition of a recession given the GDP number coming tomorrow?

BRIAN CHEUNG: Well, Dave, we'll have to see in about, I don't know, 27 minutes or so. When we talk about Jay Powell's approach to all of this, though, you would probably expect him to say what he's already been saying, which is the Fed is going to do its part to try to land this plane without any issues. Of course, that seems to be a picture that's getting a little bit gloomier and shows that the job of actually a smooth landing is going to be a lot harder than the Fed had projected perhaps earlier in the year.

Now of course, the Fed is going to say, at least for right now, it is going to continue to raise interest rates. But again, who knows how long and persistent the war in Ukraine is going to be on energy prices? Who knows what the inflation expectations are going to look like as Americans continue to talk about the R-word? How does that shape any sort of behavior when it comes to consumption or businesses when it comes to investment?

So I think the Fed chairman, in a few minutes, is probably going to say something to the effect of look, as far as their knitting, they stick to interest rate increases. And we know that up until today, monetary policy was still very largely accommodative because it was below that 2.4% that people estimate as still stimulative to the economy. After today, that might now start to be restrictive. So that's probably going to be a talking point. And again, we'll have to listen in about 25 minutes or so.

SEANA SMITH: And Brian, it's also a tough balancing act here with the Fed because the other question out there is how much hiking can the economy absorb at this point because the Fed still very aggressive as we see very high inflation, but the economy is slowing down a little bit. So it'll be interesting, I guess, to see how Jay Powell is able to walk that line, as well, because he doesn't want to get too aggressive in the fact that then that could potentially spook the markets.

BRIAN CHEUNG: And that is exactly the reason why the Fed didn't just instantly raise interest rates to, say, 3 and 1/2% or 4% already because the markets are not quite ready for that. And in fact, one big difference between this meeting and the last meeting is that for the first time, you're starting to see the 10-year yield price in the chance of a Fed cut at some point. Now, some of this may have been natural because the Fed couldn't raise interest rates forever. But as of the last meeting, you still saw the continued rip up in the 10-year.

And essentially over the last six weeks, you have seen the 10-year fall down by about 75 basis points. I'd be interested to see-- I don't have a computer right in front of me-- of what the 10-year is doing right now. But of course, with that action over the last six weeks, that is bond market traders pricing in a high likelihood that at some point, the Fed's going to have to do a U-turn on all of this, how abrupt is that going to be?

I think that turn is going to depend on how hard we go into a recession if that does end up happening. You have a lot on Wall Street saying, well, maybe then the second half of next year is when that U-turn happens. But look, I'm starting to see some reports and some analysts that are saying, hey, it's possible that they're going to start to pull that call up to maybe the first half of next year.

SEANA SMITH: You're seeing a bit of a reaction here in the 10-year as we pull that up. It's still not a heck of a lot of movement, at least just yet. I think you can say off just about 2.7%. All right. Brian Cheung, thanks so much. We're going to check back in with you in just a little bit after the press conference.