WASHINGTON, July 14 — The Federal Reserve’s campaign to cool the American economy stands at a critical juncture today, more than four years after it began raising interest rates from near zero. The central bank’s dual mandate from Congress—to promote maximum employment and stable prices—remains the bedrock of its policy, but the path to that goal has been anything but smooth. The story of this fight against inflation begins in March 2022.
That month, the Fed started a series of interest rate hikes, responding to price pressures that had built up during the pandemic recovery. By June 2022, the Consumer Price Index had hit a 40-year high of 9.1%.
The central bank’s primary tool for influencing the economy is the federal funds rate—the interest rate at which banks lend reserves to each other overnight. Starting from a target range of 0% to 0.25% in early 2022, the Federal Open Market Committee raised rates 11 times. By July 2023, the federal funds rate stood in a target range of 5.25% to 5.50%.
The FOMC, which meets eight times per year, makes these decisions. Jerome Powell, appointed Chair in 2018 and reappointed in 2022, leads the committee.
The Tools in the Toolbox
Beyond the federal funds rate, the Fed has other levers. It sets the discount rate—the interest rate for direct loans to banks. It also uses quantitative easing, buying bonds to lower long-term rates, and quantitative tightening, selling bonds to raise long-term rates.
Reserve requirements, another tool, have not been actively used since 2020. These actions ripple across the economy.
Mortgage rates, credit card rates, business loans, and the stock market all feel the effects. By October 2023, 30-year fixed mortgage rates had exceeded 7%, slowing the housing market.
Resilience and the Soft Landing
Despite the aggressive tightening, the U.S. economy showed resilience. In the third quarter of 2023, GDP growth came in at 2.5%. The Fed’s goal, as it has stated repeatedly, is to bring inflation down to its 2% target without causing a severe recession—a scenario economists call a ‘soft landing.’ The question now, as the summer of 2026 unfolds, is whether that soft landing is within reach.
The Fed has held rates steady for an extended period, watching for signs that inflation is sustainably returning to target. The labor market remains a key indicator, as does consumer spending.
Jerome Powell and his colleagues on the FOMC face a delicate balancing act. Move too soon to cut rates, and inflation could reignite. Wait too long, and the economy could tip into recession.
The data in the coming months will shape their next move. The next FOMC meeting will be closely watched for any shift in language or policy.
Sources
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