The Federal Reserve imposed another super-charged interest rate hike Wednesday, but officials signaled a move to smaller increases is in store as fears mount that inflation-fighting efforts will prompt a recession.
The rate-making Federal Open Market Committee hiked its benchmark rate by three-quarters of a percentage point following a two-day meeting. The latest hike moved the Fed’s target funds rate range to between 3.75% and 4% — the highest since 2008.
The FOMC said it “anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.
At the same time, however, the committee’s statement used new language acknowledging concerns about the pace of its hikes — an apparent attempt to ease anxiety that soaring interest rates will spark a painful downturn that could kill thousands of jobs across the US economy.
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the statement added.
Investors were receptive to the Fed’s softening language. The Dow Jones Industrial Average surged more than 350 points ahead of Powell’s scheduled press conference. The tech-heavy Nasdaq and the broad-based S&P 500 also traded in positive territory.
Fed Chair Jerome Powell and other policymakers have indicated for months they will hike interest rates into restrictive territory and hold them there until inflation begins to decline.
But investors are watching closely for signs that the Fed will soften its policy stance due to a weakening economy.
The latest interest rate hike was in line with the market’s expectations. Hours before the Fed’s announcement on Wednesday morning, investors were pricing in an 88% probability of a three-quarter percentage point hike and a roughly 12% probability of a smaller half-point hike.
The Fed’s current projections call for another half-point hike at their two-day meeting in mid-December – with more increases expected in in early 2023.
Changes to the benchmark interest rate have major implications for the broader economy, affecting credit card interest rates, auto loans, savings accounts and more.
“It has been a cruel summer and fall for credit cardholders, and unfortunately we’re likely headed to a winter of discontent as interest rates continue to rise and inflation remains high,” said Matt Schulz, chief credit analyst at LendingTree.
Mortgage rates also spike in response to tightened Fed policy, as evidenced by this year’s surge about 7% for a 30-year fixed-rate mortgage.
As The Post has reported, demand in the US housing market has collapsed as mortgage rates rise, forcing many sellers to slash their asking prices in an effort to entice buyers.
“Despite a rapidly cooling housing market, inflation has shown no signs of letting up, the labor market is still strong, and the economy is resilient,” said Bankrate chief financial analyst Greg McBride. “This forces the Fed to continue its aggressive approach on interest rates.”
The Fed has now hiked by three-quarters of a point for the fourth consecutive meeting – an abnormally sharp pace highlighting the pressure officials face to bring down prices. Prior to this year, the central bank hadn’t implemented a hike of that size since 1994.
Inflation ran at a hotter-than-expected 8.2% in September as sharp increases in grocery and housing prices hammered US households. The latest Consumer Price Index data for October will be released next week.
The Fed’s response to inflation has drawn a polarizing response. Ex-Treasury Secretary Larry Summers warned the Fed this week against making a “dovish pivot” too soon.
“Although market participants anxiously await the end of the Fed’s rate hike cycle, they do not want the Fed to pause long enough to allow inflation to continue to build and leave an economic underpinning of stagflation,” LPL Financial strategists said in note to clients this week.
Meanwhile, Wharton professor Jeremy Siegel asserted the Fed risks causing a depression with more rate hikes. Concerns about Fed “oversteering” are also shared by San Francisco Fed President Mary Daly, who warned last month that officials needed to avoid an “unforced downturn” in the economy.
“We have to make sure we are doing everything in our power not to over-tighten, and we can’t pull up too fast, and say we are done,” Daly said, according to Reuters.
A recent Bloomberg Economics forecast model set the probability of a recession within the next 12 months at 100%.
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