The Federal Reserve raised its interest rate for the fourth time in a row on Wednesday and signaled a possible change in how it approaches monetary policy to bring down inflation. In a well-telegraphed move that markets had been expecting for weeks, the central bank raised its short-term borrowing rate by 0.75 percentage point to a target range of 3%- 4%. The last time inflation ran this high was in the early 1980's. Markets had been looking for language indicating that this could be the last 0.75-point move.
When determining future hikes, the Fed 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.
If this is the case, the December meeting could see a half a point rate increase, followed by a few smaller hikes in the years to come. The committee anticipates that ongoing increases in the target range will be appropriate in order to achieve a stance of monetary policy that is sufficiently restrictive.
The market tried to gauge whether the Fed can implement a less restrictive policy that would include a less dramatic level of rate hikes to achieve its inflation goals after the announcement.
He said that incoming data suggests that the interest rates will be higher than previously thought.
Powell left the door open for a slower rate of increases.
The question of speed is no longer important as we move closer to that level. At some point, it will be important to slow the pace of increases. It might come as soon as the next meeting or the one after that. He said there was no decision. Along with the change in the statement, the committee categorized growth in spending and production as modest and noted that job gains have been robust recently. The committee is attentive to inflation risks, according to the statement.
Recent inflation readings show prices are close to 40-year highs. A historically tight jobs market in which there are nearly two openings for every unemployed worker is pushing up wages, a trend the Fed is trying to head off. The Fed's efforts to bring down the cost of living could cause the economy to go into recession. The U.S. economy this year has shown virtually no growth even as the full impact from the rate hikes has yet to kick in. Excluding food and energy costs, the cost of living rose 5.1% in September from a year ago. GDP fell in the first and second quarters, but rebounded in the third quarter due to a rise in exports. Demand for housing has fallen as 30-year mortgage rates have gone up. Markets on Wall Street have been rising in anticipation that the Fed might start to ease back as concerns grow over the long-term impact of higher rates. The S&P 500 has gained more than 10% over the past month, in part because of an earnings season that wasn't as bad as feared, and in part because of growing hopes for a recalibration of Fed policy. The yield on the Treasury has come off their highest levels since the early days of the financial crisis. The benchmark 10-year note has been around for a long time. The anticipation is on a slower pace because there isn't much expectation that the rate hikes will stop soon. There is a near coin-flip chance of a half-point increase in December. The fed funds rate will top out around 5% before the rate hikes stop. The fed funds rate sets the level that banks charge each other for overnight loans but spills over into multiple other consumer debt instruments.
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