US Federal Reserve hikes another big rate, but hints at a pullback

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7;s move raised its key short-term rate from 3.75% to 4%, its highest level in 15 years. This was the central bank’s sixth rate hike this year

The Fed’s move raised its key short-term rate from 3.75% to 4%, its highest level in 15 years. This was the central bank’s sixth rate hike this year

The Federal Reserve on Wednesday raised its benchmark interest rate by three-quarters of a point for the fourth time in a row, but indicated it may soon reduce the size of its rate hikes.

The Fed’s move raised its key short-term rate from 3.75% to 4%, its highest level in 15 years. It was the central bank’s sixth rate hike this year – a streak that has made mortgages and other consumer and business loans increasingly expensive and increased recession risk.

But in a statement, the Fed suggested it may soon move to a more deliberate pace of rate hikes. It said it would consider the cumulative impact of its big rate hikes on the economy in the coming months. It noted that increases in its rates take time to fully affect growth and inflation.

Those words signaled that the Fed’s policymakers think the cost of borrowing is getting high enough to slow the economy and reduce inflation. If that’s the case, it would mean they don’t need to raise rates as fast as they are.

Yet, for now, the persistence of inflated prices and high borrowing costs is straining American households and undermining Democrats’ ability to campaign on the health of the job market as they try to take control of Congress. . Republican candidates have outperformed Democrats on the punitive effects of inflation ahead of the midterm election that ends on Tuesday.

The Fed’s statement came after its latest policy meeting on Wednesday. Many economists expect Chair Jerome Powell to indicate at a news conference that the Fed’s next expected rate hike in December could be only half a point instead of three-quarters.

Typically, the Fed raises rates in quarter-point increments. But after miscalculating easing inflation as a potential fluke last year, Mr. Powell led the Fed to aggressively raise rates to try to slow borrowing and spending and ease price pressures. has done.

Wednesday’s latest rate hike coincides with growing concerns that the Fed may tighten credit so much as to derail the economy. The government has pointed out that the economy has grown in the last quarter, and employers are still hiring at a solid pace. But the housing market has collapsed, and consumers are barely increasing their spending.

Mortgage buyer Freddie Mac reported that the average rate on a 30-year fixed mortgage, just 3.14% a year ago, was up from 7% last week. Existing home sales have been falling for eight consecutive months.

Blarina Urusi, an economist at T. Rowe Price, suggested that falling home sales are “the canary in the coal mine” indicating that the Fed’s rate hike is weakening a highly interest-rate sensitive sector such as housing. Ms Urusi noted, however, that Fed hikes have not yet meaningfully slowed the rest of the economy, particularly the job market or consumer demand.

“As long as those two components remain strong,” she said, the Fed’s policymakers “can’t count on inflation coming down” within the next two years closer to its 2% target.

Several Fed officials have said recently that they are yet to see meaningful progress in their fight against rising costs. Inflation in September rose 8.2% from 12 months ago, just below the highest rate in 40 years.

Still, policymakers may feel they may soon slow down the pace of their rate hikes as some early signs suggest that inflation may begin to decline in 2023. Consumer spending, squeezed by high prices and expensive loans, is barely growing. Supply chain disruptions are decreasing, which means fewer shortages of goods and parts. Wage growth is stabilizing, after which, if it declines, inflationary pressures will ease.

Yet the job market continues to remain strong, which could make it harder for the Fed to cool the economy and curb inflation. This week, the government reported that companies posted more job opportunities in September than in August. There are now 1.9 jobs available for every unemployed worker, an unusually large supply.

A higher ratio means that employers will continue to increase wages to attract and retain workers. Those higher labor costs are often passed on to customers in the form of higher prices, leading to more inflation.

Ultimately, economists at Goldman Sachs expect the Fed’s policymakers to raise its key rate to around 5% by March. This is much higher than what the Fed had forecast in its previous forecasts in September.

Outside the United States, several other major central banks are also raising rates rapidly to try to cool off inflation levels that are even higher than the US.

Last week, the European Central Bank announced its second consecutive jumbo rate hike, raising rates at the fastest pace in the history of the euro currency to try to contain inflation that rose to a record 10.7% last month.

Similarly, the Bank of England is expected to raise rates on Thursday to try to slash consumer prices, which rose at the fastest pace in 40 years to 10.1% in September. Even as they raise rates to combat inflation, both Europe and the UK seem to be heading for a recession.