Topline
The Federal Reserve on Wednesday signaled it may soon ease up on its most aggressive economic tightening campaign in three decades as it raised interest rates by another 75 basis points—further pushing borrowing costs to the highest level since the Great Recession in order to help temper the nation’s stubbornly high inflation.
Some sectors of the economy have already started tanking, but the Fed’s work in taming inflation is … [+]
Key Facts
At the conclusion of its two-day policy meeting on Wednesday, the Federal Open Markets Committee said it voted unanimously to raise the federal funds rate (the rate at which commercial banks borrow and lend reserves) by 75 basis points for the fourth meeting in a row to a target range of 3.75% to 4%—the highest level since early 2008.
In the announcement, officials changed their tune in a dovish direction, still saying that ongoing increases in the federal funds rate will be appropriate but also adding that the committee will take into account “the lags with which monetary policy affects economic activity” in determining the pace of future increases.
Fed Chair Jerome Powell doubled down on the potential slowing in an afternoon press conference, saying the time to slow rate hikes may come as soon as the next meeting but also insisting he doesn’t think the Fed has overtightened and that recent data suggests officials may ultimately move rates higher than they previously thought.
Even though Powell laid out a case for slowing the pace of tightening after the last increase in July, policymakers changed their tune after inflation, as measured by the consumer price index, rose more sharply than expected in both August and September, suggesting the central bank has more work to do before taming rising prices.
In a weekend note, a team led by Goldman Sachs economist Jan Hatzius projected the Fed will hike to a top rate of 5% next year—eclipsing the 4.9% projection the Fed issued in September and far higher than the central bank’s December projections calling for a top rate of 3.1%.
What To Watch For
The Fed has just one more policy meeting this year, concluding on December 5. Goldman expects officials will slow the pace of rate hikes to half a point, followed by a quarter-point hike in January.
Key Background
The Fed began raising rates as inflation reached a 40-year high in March, but expectations for the pace and intensity of incoming rate hikes have grown more aggressive amid stubborn price gains and criticism that the central bank waited too long to start the hikes. The increases, which work to slow inflation by tempering consumer demand, have already tanked the housing and stock markets: The S&P is down 20% this year, and existing home sales have plummeted 24%. However, the labor market and corporate profits have remained largely resilient. “With a large portion of the economy yet to display much response to higher interest rates, this is likely to cause the Fed concern going forward as it attempts to balance the risks of under- and over-tightening,” notes wealth advisory Glenmede.
Big Number
8.2%. That was the annual inflation rate as measured by the consumer price index in September. It’s down from a peak of 9.1% two months earlier, but still vastly higher than the Fed’s long-time target of 2%.
Further Reading
One Recession Indicator Isn’t Flashing Warning Signs Yet—Here’s Why That May Change (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2022/11/02/fed-raises-rates-another-75-basis-points-further-pushing-borrowing-costs-to-highest-level-since-great-recession/