The Federal Reserve raised the key short-term interest rate by 75 basis points in response to the release of the May headline CPI number, which increased to 8.6%. This marked the first 75 basis point increase in the Fed funds rate since 1994. That wasn’t the most unusual thing about the announcement. All year, Fed Chairman Powell has been striving to telegraph to markets exactly what the Fed’s intentions are with rates. Clarity and allowing time for markets to adjust has been the strategy for minimizing disruption.
The CPI inflation number release came at the tail end of the “blackout” period the Fed observes around communications before an FOMC meeting. Without the ability to communicate the Fed’s thinking to the markets, the Fed Chair had to weigh the possible loss of credibility such a surprise announcement would cause against the urgent need to combat inflation aggressively.
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