Federal Reserve raises rates significantly once more but suggests a reduction is imminent
The Federal Reserve raised its benchmark interest rate by three-quarters of a percent for a fourth straight day Wednesday but signalled that it may soon pause its rate hikes.
The Fed hiked its benchmark short-term rate to 3.75–4%, the highest level in 15 years. The central bank’s sixth rate hike this year has raised mortgage rates and the possibility of a recession.
The Fed hinted to a slower rate of rate hikes in a statement. It said it would assess the cumulative economic impact of its significant rate hikes in future months. It said rate hikes take time to effect growth and inflation.
The Fed’s officials may think borrowing prices are high enough to slow the economy and lower inflation. If so, they may not need to raise rates as fast.
Still, increasing prices and borrowing rates are hurting American households and making it harder for Democrats to campaign on the job situation as they strive to keep Congress. In the run-up to Tuesday’s midterm elections, Republicans have pounded Democrats on inflation’s harsh effects.
Wednesday’s Fed statement followed its latest policy meeting. At a news conference, economists expect Fed Chair Jerome Powell to indicate that the December rate hike may be only a half-point.
The Fed typically boosts rates by quarter-points. Powell has led the Fed to rapidly hike rates to curb borrowing and spending and reduce price pressures after misjudging inflation last year.
Wednesday’s rate increase came amid concerns that the Fed may tighten credit too much and destroy the economy. Last quarter’s economy grew, and firms are continuing recruiting. The housing market has collapsed, and consumers are scarcely spending more.
Last Monday, mortgage buyer Freddie Mac revealed that the average 30-year fixed mortgage rate rose beyond 7 percent from 3.14 percent a year earlier. Existing house sales have fallen for eight months.
The Fed’s rate hikes are harming a highly interest-rate sensitive sector like housing, according to T. Rowe Price analyst Blerina Uruci. However, Uruci highlighted that the Fed’s hikes haven’t yet significantly hampered the economy, notably the employment market or consumer demand.
She said the Fed “cannot count on inflation coming down” near to its 2 percent objective within two years as long as those two components stay robust.
Recently, several Fed officials have stated they have yet to see real headway in their fight against growing expenses. September inflation was 8.2%, just below the highest rate in 40 years.
Still, early evidence show inflation may start decreasing in 2023, so authorities may feel they can slow their rate hikes. Consumer expenditure is scarcely expanding due to high costs and higher borrowing. Goods and parts shortages are decreasing as supply chain bottlenecks ease. Wage growth is plateauing, which could reduce inflationary pressures.