Synopsis: Fed hikes interest rates by 0.75 percentage point for the fourth time in a row on Wednesday, as central bankers continue to fight inflation despite growing concern about the risks of a recession next year.
Fed hikes interest rates again, up 0.75 percentage points
On Wednesday, The Federal Reserve raised interest rates by 0.75 percentage point for the fourth time in a row, as central bankers continued to fight inflation despite the growing uncertainty about the dangers of a recession next year.
“In determining the pace of future increases in the target range, the Committee will consider the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” bank officials said in a statement issued at the conclusion of the Fed’s two-day policy meeting.
The rate increase was expected, as policymakers have shown no indications of relenting in their most aggressive rate hike campaign in decades. The Fed hiked interest rates six times this year, bringing the federal funds rate to between 3.75 and 4 percent, which is deemed “restrictive” territory and should hamper economic growth. The question now is when and how policymakers will decide to lessen, if not halt, their effort, especially as concerns grow that they may overcorrect or outpace their capacity to discern whether their measures are working. According to the Fed’s own predictions, the next meeting in December might see a half-point boost, followed by a lesser hike in early 2023.
The Fed hikes interest rates once more.
The Federal Reserve establishes a tight range for its short-term interest rate objective.
Market volatility has returned following the confirmation of another Fed hike.
Following Wednesday’s interest rate announcement, the Dow Jones industrial average temporarily rose before reversing course and falling 500 points down.
Many economists predicted a 0.75 percentage point increase in the federal funds rate, but Federal Reserve Chair Jerome H. Powell also hinted that more raises are on the way.
The Dow fell more than 1.5 percent on the day. Despite a brief boost following the Fed’s pronouncement, the S&P 500 index fell 2.5 percent, while the tech-heavy Nasdaq fell more than 3.3 percent.
Investors are assessing whether the central bank can walk the line between containing inflation and precipitating a recession. According to MarketWatch, the Volatility Index of the Chicago Board Options Exchange, also known as “Wall Street’s fear barometer,” has risen about 70% in the last year.
“The concern is that inflation remains and is projected to be persistently high, and further hawkish monetary policy language will almost certainly trigger a drop in stocks,” said Ivan Feinseth, chief investment officer of Tigress Financial Partners, in a commentary Wednesday.
The IT sector was among the hardest hit. Amazon’s stock fell 4.8 percent on Monday, a day after the juggernaut’s market capitalization fell below $1 trillion for the first time since April 2020. Tesla shares plunged more than 5.6 percent, while Meta Platforms shares fell about 5 percent.
Powell channels Friedman in pushing back on calls to slow down
Fed Chair Jerome H. Powell said Wednesday that he sees no reason to decrease the pace of interest rate increases, despite the fact that the central bank is tightening lending at its quickest rate since the early 1980s.
Since March, the Fed has been stomping on the monetary policy brakes, yet the economy has continued to accelerate.
Inflation-fighters interpret this as the central bank continuing to raise interest rates in order to restrict economic activity and take the steam out of consumer prices. Others on Wall Street and among congressional Democrats believe the Fed should slow pace to allow increased borrowing prices to take effect.
In answer to a reporter’s question, Powell agreed that monetary policy had “long and variable” lags, citing an oft-quoted 1961 research paper by economist Milton Friedman.
According to recent research, those delays may be shorter today. Before tightening financial conditions, investors no longer wait for the Fed to boost interest rates. Instead, they change their investment selections based on what they expect the Fed to do.
Powell stated that the present high-inflation climate is too new to know how long it will take for higher rates to effect individual household and corporate decisions.
“We have no idea. “It’s quite uncertain,” he remarked.
The booming labour market shows that the Fed hasn’t gone too far in raising interest rates, according to Powell. And, at this time, he believes that the risks of not hiking rates sufficiently outweigh the risks of raising them too much.
“It is very premature to be thinking about pausing,” he told reporters. “We have a ways to go.”
Mortgage rates may remain high for ‘another year or two,’ according to an expert.
Mortgage rates, now above 7 percent, have more than doubled this year in response to the Federal Reserve’s drastic tightening measures.
The mortgage market has already priced in today’s increase of three-quarters of a percentage point, which means economists don’t expect a marked surge in the coming weeks. But they say mortgage rates — which are already near 20-year highs — are likely to remain elevated for several months.
“Once inflation is contained, mortgage rates will start to drift lower,” Lawrence Yun, chief economist at the National Association of Realtors, wrote in an email. “It may be another year or two before that happens.”
For more, visit Zesacentral!