Fed Raises Rates Another 75 Basis Points—Pushing Borrowing Costs To Highest Level Since Great Recession

Topline

The Federal Reserve on Wednesday doubled down on its most aggressive economic tightening campaign in three decades, raising interest rates by another three-fourths of a percentage point and pushing borrowing costs to the highest level since the Great Recession in order to help temper the nation’s stubbornly high inflation—even as experts worry the hawkish tightening could drive the economy into a recession.

Fed Chair Jerome Powell has acknowledged lowering prices will require “some pain” for American … [+] households.

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Key Facts

At the conclusion of its two-day policy meeting on Wednesday, the Federal Open Markets Committee said it would raise the federal funds rate (the rate at which commercial banks borrow and lend reserves) by 75 basis points for the third meeting in a row to a target rate of 3% to 3.25%—the highest level since 2008.

Even though Fed Chair Jerome Powell laid out a case for slowing the pace of tightening after the last increase in July, Fed officials changed their tune after the Labor Department reported consumer prices rose more sharply than expected in August, suggesting the central bank has more work to do before taming inflation.

Officials also said they project the federal funds rate will be at about 4.4% by the end of the year, suggesting they will raise rates by at least 50 basis points for the next two meetings; stocks sank immediately after the announcement, with the Dow Jones Industrial Average reversing gains to trade down 100 points.

Fed policymakers began raising rates in March, as they had signaled they would for months, but expectations for the pace and intensity of future rate hikes have grown more aggressive amid stubborn price gains and criticism that the central bank waited too long to start the hikes; at one point this month, bond markets priced in a one-in-four chance of a full-point rate hike.

By making borrowing more expensive and thereby tempering demand, rate increases are critical in combating inflation, but “growing fears” that the hikes will spur a recession by undercutting economic growth are the “driving forces” behind recent market weakness, notes analyst Tom Essaye of the Sevens Report.

Key Background

The market had its worst showing in months last week after the worse-than-expected August inflation data, which showed prices climbed at 8.3% year over year and fueled concerns that Fed officials may need to act more aggressively in order to quell inflation. The S&P is down 10% since its peak in August and has plunged nearly 20% this year. “The Fed has more work to do,” Bank of America’s Savita Subramanian wrote in a recent note. “Lessons from the 1970s tell us that premature easing could result in a fresh wave of inflation—and that market volatility in the short run may be a smaller price to pay.”

What To Watch For

The Fed’s next policy meeting concludes November 2. Economists at Goldman Sachs project policymakers will raise rates by 50 basis points at that meeting, and another 50 basis points in December.

Tangent

In a note to clients, Keith Lerner, chief market strategist at Truist Advisory Services, said he expects the Fed will likely keep interest rates elevated for longer in order to offset the inflation challenges that have lingered for more than a year—”even if it requires more economic pain,” as officials have warned last month. Lerner points out that fund managers surveyed by Bank of America are showing signs of extreme bearishness, piling up on cash at the highest level since 2001 and limiting exposure to stocks (at record low levels) as global economic growth expectations near an all-time low in light of central bank tightening efforts.

Crucial Quote

“The biggest and growing downside risk for the market is increasing recession risk as the Fed aggressively tightens into a slowing economy,” says Lerner. “Historically, once inflation exceeded 5%, it has generally taken a recession to bring it back down.” That’s consistently been the case since at least 1970.