Wednesday’s move is expected to ripple through the economy, driving up rates for credit cards, home equity lines of credit and other loans…reports Asian Lite News
The Federal Reserve plowed ahead with a fourth straight historically large interest rate hike Wednesday — an increase of 0.75 percentage point — in an effort to beat back soaring inflation.
But as the Fed’s monthslong campaign increasingly risks a recession next year, the main question now is – Will it dial back the rate hikes in December or wait until inflation shows clear signs of abating?
At a news conference, Fed Chair Jerome Powell said the Fed could slow the pace of hikes as soon as next month.
“That time is coming and it may come as soon as the next meeting or the one after that,” Powell said.
But he added the Fed isn’t close to pausing its rate hike campaign and needs to boost rates a good bit more to reach a level that’s “sufficiently restrictive” to lower inflation to the Fed’s 2% target. The concern, he said, is that inflation could become “entrenched” in the expectations of consumers and businesses and the Fed must move decisively to head off such a dynamic.
“It’s very premature to be thinking about pausing,” Powell said. “We have a ways to go.”
A remedy for high inflation, Fed hikes:How to fix high inflation, weak growth and labor shortages? Boost worker productivity.
Citing recent high inflation figures, he added that rates could well rise above the 4.5% to 4.75% range that Fed officials previously anticipated.
The inflation numbers “do suggest to me that we may move to a higher level than we thought at the September meeting,” Powell said. “There’s no sense that inflation is coming down.”
In a statement after a two-day meeting, Fed officials said that in weighing future rate increases they’ll consider the large increases they already have approved and the typical lag between the Fed’s actions and their effects on the economy.
Wall Street appeared to interpret that as a signal the Fed will soon reduce the pace of hikes, with stock rising sharply, but Powell downplayed that view.
The Fed, as widely expected, raised its key short-term rate by three-quarters of a percentage point to a range of 3.75% to 4%, a decidedly “restrictive” level intended to fight inflation by further slowing an already wobbly economy. Since March, the Fed has hoisted its federal funds rate – what banks charge each other for overnight loans — from near zero, its most aggressive such initiative since 1980.
The strategy, along with inflation that’s still just modestly below the 40-year high reached earlier this year, is likely to tip the economy into a recession by next year, according to most economists surveyed by Wolters Kluwer Blue Chip Economic Indicators.
Wednesday’s move is expected to ripple through the economy, driving up rates for credit cards, home equity lines of credit and other loans. Fixed, 30-year mortgage rates already have jumped above 7% from 3.22% early this year. At the same time, households, especially seniors, are finally reaping higher bank savings yields after years of meager returns.
Since the Fed’s last meeting six weeks ago, there have been some hints that inflation soon could ease. U.S. monthly job growth has fallen from 537,000 in July to 263,000 in September, though that’s still solid number. And private-sector wages and salaries grew 5.2% annually in the July-September period, still historically high but down from 5.7% the previous quarter.
The most widely followed inflation gauge, the consumer price index, showed that overall prices in September were up 8.2% from a year earlier, down from a four-decade high of 9% in June.
But those developments have been outnumbered by signs that inflation will likely drift down just slowly. The Fed’s preferred inflation measure, which excludes food and energy costs, rose to 5.1% in September from 4.9% the previous month. Consumers’ inflation expectations in one and five years – which often affect actual price increases — rose last month after falling previously.
And job openings surged from 10.3 million to 10.7 million in September after coming off record highs in the spring and summer. That could again put upward pressure on wages as employers compete for a pool of workers that’s still limited compared with the pre-pandemic level.
“We aren’t going to declare victory until we really see convincing evidence, compelling evidence that inflation is coming down,” Powell told reporters in June.
Even without big Fed rate increases, economists still expect inflation to slow as supply-chain bottlenecks ease, commodity prices fall, a strong dollar lowers import costs and retailers offer discounts to unload swollen inventories.
Powell, however, has repeatedly said it’s critical that the Fed bump up rates to tamp down consumers’ inflation expectations.