The Federal Reserve raised the benchmark federal funds rate by 75 basis points to a new target range of 3 to 3.25 percent on Wednesday, matching market expectations.
This is the third consecutive three-quarter point rate hike, as the Federal Open Market Committee (FOMC) lifted interest rates to their highest levels since 2008.
Markets had widely anticipated that the Fed was going to pull the trigger on a 75-basis-point rate hike. Because of a higher-than-expected August inflation report, there was some expectation that the Fed could surprise everyone and move ahead with a supersized 100-basis-point increase to the fed funds rate.
The central bank’s dot-plot—a chart of rate-setting Committee members’ projections for interest rates—was revised upward.
The Fed now sees rates to end the year at 4.4 percent and reach 4.6 percent in 2023. FOMC members then see rates easing to 3.9 percent in 2024 and 2.9 percent by 2025.
The Fed confirmed that it is “highly attentive to inflation risks.”
“Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the FOMC said in a statement.
“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”
The U.S. central bank has been on an inflation-busting crusade since March, when it began its tightening cycle. However, Jason Brady, the president and CEO at Thornburg Investment Management, says that the Fed is still behind the curve.
“These are massive moves from a Fed that is still behind where they need to be to get inflation under control,” he wrote in a note. “Now it’s clear that we’ll have rates ‘higher for longer,’ a situation diametrically opposed to what markets have been used to for the last decade and a half.”
According to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, investors are more likely to concentrate on what the rate-setting Committee is saying and what the dot-plot—a chart of where FOMC members see interest rates heading—conveys to the broader economy.
What Does This Mean for the Economy?
When interest rates rise, the cost of borrowing becomes more expensive for businesses, consumers, and governments. This manufactures a cascading effect as consumer demand wanes, business activity slows, investors invest less capital, and housing affordability diminishes.
While the objective behind a rising-rate campaign is to rein in inflation, the monetary policy directive can have broader consequences for the economy, especially one that is driven two-thirds by consumption.
After more than a decade of easy money policies, higher interest rates can “mean pain, pure and simple,” says Kirk Kinder, a financial planner at Picket Fence Financial.
“All asset prices have thrived on low rates: stocks, bonds, real estate. As rates rise, all of these assets, which were at historically high valuations, will come under pressure,” he told The Epoch Times, adding that consumers will have less discretionary income and corporate profits will take a hit.
“The economy had become so addicted to low rates that an increase like we have seen could spell disaster to the economy and markets,” he said. “It’s similar to taking drugs away from an addict. The withdrawal is painful.”
But while Powell has purported throughout most of 2022 that he would be attempting to steer the economy to a so-called soft landing, he has ostensibly given up this rhetoric in favor of a “growth recession.” This is when economic growth is tepid but not low enough to be defined as a technical recession, although the United States slipped into one following two straight quarters of negative GDP prints.
In addition to domestic issues, the Fed’s rate hikes can also affect the international marketplace. As the central bank engages in quantitative tightening, it has strengthened the U.S. dollar to its best level in more than 20 years.
The U.S. Dollar Index (DXY), which gauges the greenback against a basket of currencies, has surged 15 percent year-to-date to around 110.00. A stronger buck can make it more expensive for foreign participants to purchase American goods and services.
The next two-day FOMC policy meeting will take place on Nov. 1–2. The Fed’s future action might depend on the next consumer price index (CPI) and jobs reports. For now, the market is penciling in a half-point boost. But a lot could change between now and when Fed policymakers next gather.
At this stage, according to Jeff Gundlach, CEO of DoubleLine Capital, “the Fed might overtighten.”
From The Epoch Times