On The Money — Why the Fed went off script and hiked rates faster

·6 min read

The Federal Reserve delivered its biggest interest rate hike in nearly 30 years on Wednesday and we’ll explain how we got here. We’ll also look at President Biden’s plea to oil companies and a new attempt to bring down shipping costs.

But first, find out why COVID-19 cases have hit a plateau.

Welcome to On The Money, your nightly guide to everything affecting your bills, bank account and bottom line. For The Hill, we’re Sylvan LaneAris Folley and Karl Evers-Hillstrom. Someone forward you this newsletter? Subscribe here.

Fed hikes rates by 75 basis points

The Federal Reserve announced Wednesday it would hike interest rates this month at the fastest pace in nearly 30 years after a discouraging May surge in inflation.

The Federal Open Market Committee (FOMC), the panel of Fed officials responsible for setting interest rates, said it would raise the bank’s baseline interest rate range to 1.5 to 1.75 percent, an increase of 0.75 percentage points.

The background: The Fed’s unusually large interest rate hike follows a tumultuous four-day stretch for financial markets.

  • Stocks have plunged, bond yields have skyrocketed and cryptocurrency values have collapsed in the wake of an alarming increase in price growth last month.  

  • The Labor Department announced Friday that the consumer price index (CPI), a closely watched gauge of inflation, rose 1 percent in May alone and 8.6 percent over the past 12 months — far exceeding the expectations of economists.

Sylvan explains here.

MAY INFLATION DRIVING RATE HIKE

The Fed was already on track to raise interest rates by 0.5 percentage points in June following an identical hike in May and a 0.25 percentage point hike in March. While Fed Chair Jerome Powell and other top bank officials left the door open to a larger or smaller hike, they made clear they expected another 50 basis point hike to be the best path forward.

“When I offered that guidance at the last meeting, I did say it was subject to the economy performing about in line with expectations,” Powell said during a Wednesday press conference.

Powell said after the Fed’s last rate hike in May — an increase of 0.5 percentage points — that identical hikes were likely on the way in June and July if the economy held up as Fed officials expected. But the release of surprisingly high inflation data on Friday and subsequent polls of where consumers expected inflation to end up convinced Fed officials to hike rates faster.

“Since then, inflation has again surprised to the upside, some indicators of inflation expectations have risen and inflation projections for this year have been revised up notably. In response to these developments, the committee decided on a larger increase in the target range at today’s meeting.”

Sylvan has more from Powell’s presser here.

LEADING THE DAY

Biden presses oil companies to boost gasoline supply

President Biden is demanding top oil executives boost the supply of gasoline, diesel and other refined products on the market to combat rising prices.

Biden told the executives in a letter this week that historically high profit margins for refining oil into gasoline and diesel were “not acceptable” during a time of war and called on the companies to work with his administration to address price increases caused by Russia’s invasion of Ukraine, according to copies of the letter shared with The Hill.

  • Biden is directing Energy Secretary Jennifer Granholm to convene an emergency meeting on gas prices with industry leaders in the coming days and warned that he is prepared to use his emergency powers to increase refinery output and capacity. 

  • The president also asked the companies to explain why they reduced refining capacity and how they plan to address current challenges.

The Hill’s Morgan Chalfant has more here.

SCRUTINIZING SHIPPERS

New shipping legislation targets supply chain bottleneck

Legislation aimed at curbing the power of the container shipping industry, which has seen prices increase tenfold during the pandemic, breezed through the House Monday and could head to the Oval Office for a signature as soon as this week.

The administration is hoping the law, which is designed to slash the bargaining power of container shipping companies and their industry alliances, will address a critical bottleneck in global supply chains — an issue economists widely believe is a key factor driving inflation.

  • But experts caution that supply chain fixes for inflation can be elusive and that tinkering with the logistical channels that deliver bargain manufactured goods based on cheap labor from Asia can have unexpected consequences.  

  • Supply chains over the last few decades have been pared down to minimize costs and generally don’t bother developing and maintaining the infrastructure that can accommodate big swings in demand.

Tobias Burns explains here.

PASS THAT 

Democrats eye marijuana bill as vehicle for justice measures

Senate Democrats are eyeing a cannabis banking bill that has bipartisan support as a potential vehicle for long-sought restorative justice measures.

Prominent Democrats have been pushing to pass the SAFE Banking Act, which would enable legally operating cannabis firms to use banking services, as part of a larger China competition package being conferenced in both the House and Senate. The bill was included in House Democrats’ competition bill passed earlier this year, but not in the bipartisan Senate-passed version.

  • Supporters of the banking bill say it’s urgently needed to stop a surge of violent robberies targeting cash-only pot dispensaries. But the measure, which has passed the House six times in recent years, has had trouble securing passage in the Senate due to resistance from both sides of the aisle, though for different reasons.   

  • Senate Majority Leader Charles Schumer (D-N.Y.) told The Hill that Democrats are working to add social equity measures to the bill, which is backed by members of both parties. But SAFE Banking advocates worry that adding too many new provisions to the bill could hurt chances of garnering enough Republican support.

Check out more here from Karl and Aris.

Good to Know

The House began consideration of more than $1 trillion in proposed government funding for the coming fiscal year, as Democratic leadership set their sights on passing all of the chamber’s annual appropriations bills before recess in August.

Appropriators moved on Democratic-backed funding proposals for a variety of areas like defense, security for the U.S. Capitol, the Food and Drug Administration (FDA), child nutrition programs and veterans affairs, among others.

Here’s what else we have our eye on:

  • President Biden on Wednesday announced plans to send another $1 billion security assistance package to Ukraine that will include artillery, coastal defense weapons and ammunition to help the country fight off Russian forces. 

  • Republican lawmakers are targeting a proposed Security and Exchange Commission (SEC) rule requiring public companies to enhance their reporting of “ESG” information related to the environment, social impact and corporate governance. 

  • Ford is recalling 2.9 million U.S. vehicles over concerns they could roll away after drivers move the gear shift into the park position. 

  • Sen. Elizabeth Warren (D-Mass.) on Wednesday introduced legislation targeting the sale of location data by third-party data brokers.

That’s it for today. Thanks for reading and check out The Hill’s Finance page for the latest news and coverage. We’ll see you tomorrow.

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