Rate rises may slow down as officials acknowledge how they affect the economy with a lag. To combat inflation, the Federal Reserve increased interest rates by 0.75 percentage points and announced its intention to continue doing so, although in smaller increments.
Fed Chairman Jerome Powell stated that the central bank would consider lowering the pace of rate hikes to a smaller half-point increase at its December meeting but that the Fed had not yet chosen to do so. He warned that interest rates would likely rise more than policymakers anticipated in September.
According to Powell, when to slow rate hikes isn’t as important as how high and how long to raise rates.
Mr. Powell also emphasized that a reduction in the rate of rate hikes should not be interpreted as a sign that the Fed were done increasing rates. It is far too early to consider halting, said Mr. Powell. Regarding interest rates, we believe there is still much ground to cover.
Wednesday, the Fed’s rate-setting committee admitted that it might take time for this year’s rate hikes to be reflected in the economy, and they signaled that they might lower the magnitude of future rate hikes. In calculating the speed of future hikes in the target range, the committee will consider the cumulative tightening of monetary policy, the delays with which monetary policy influences economic activity and inflation, they said in a statement issued after their two-day meeting.
Officials are increasing interest rates at a rate not seen since the early 1980s to control inflation, which is nearing a 40-year high. The Federal Reserve has raised interest rates by 0.75 points four times in a row, bringing the federal funds rate between 3.75 and 4%.
The rate hike will lift the Fed’s policy rate to a level not seen since the first three weeks of 2008 when the economy was slipping into a severe recession and before the Fed increased rate cuts in response to the emerging global financial crisis.
To gauge the impact of their actions on the economy this year, some officials have shown a desire to limit the tempo of rate hikes and maybe halt rate hikes as early as the beginning of next year. They wish to limit the possibility of triggering an unwarrantedly severe delay. Other authorities have stated that it is too early for these conversations because the high inflation is so persistent and widespread.
Mr. Powell refuted worries that the Fed had hiked interest rates excessively. He stated, he has no sense that they have overtightened or proceeded too quickly.
As interest rates approach levels expected to stifle consumption, hiring, and investment, the debate over how much further to raise them may intensify. The fed-funds rate impacts interest rates on credit cards, mortgages, and auto loans, among others, across the economy.
Some experts believe that the Federal Reserve might slow the rate hike pace by implementing a smaller, half-point rise at the December meeting. Neil Dutta, an economist at the research company Renaissance Macro, said, You can’t move 75 basis points every time the data goes against you. After the fund’s rate has been above 4%, a tightening rate of 50 basis points is still rather aggressive.
While some economists predict inflation will remain higher than expected, others expect the Fed to be hard-pressed to slow its rate hikes in December.
By increasing borrowing costs, lowering stock prices, and strengthening the dollar, the Fed slows down the economy to combat inflation. In addition to the Fed’s actions at any one meeting, changes in the projected rate trajectory might impact broader financial conditions.
This year, many investors have been keen to take hints that the Fed could change to a less aggressive rate-hike pace as a sign that a rate-hike halt is imminent, but a protracted market rally spurred by such expectation would risk undercutting the Fed’s efforts to slow the growth.
At their September meeting, the majority of officials expected that they would need to raise the federal funds rate to 4.4% by December and by at least another quarter-point in 2023. Mr. Powell’s remarks on Wednesday indicated that he believes rates will likely need to increase to a somewhat higher level even if the Fed raises rates by 0.25 percentage points next month.
The debate on the rate of rate hikes may overshadow a more relevant discussion about the final rate increase. On Wednesday morning, trade-in interest-rate futures markets suggested that investors perceive a 50% chance that the Fed will raise the rate over 5% by March before maintaining it at that level.
Since the September meeting of the Federal Reserve, economic data have offered a mixed picture. While domestic demand has slowed and the housing market has entered a steep decline, the labor market has remained robust and inflationary pressures have remained considerable. Recent earnings reports indicate that consumer demand and price hikes are robust.
Despite some indications of potential alleviation, inflationary pressures have grown. The cost of commodities has plummeted. Reducing supply-chain bottlenecks might result in a slower rate of price inflation or even price decreases. The price of homes is decreasing, and rent growth has paused.
However, a robust labor market, sizable savings buffer bolstered by pandemic aid, and spectacular asset prices over the past two years might keep consumer spending buoyant, providing firms the ability to continue raising prices.
Fed policymakers are particularly concerned that tight labor markets might lead to prolonged wage rises that drive up labor-intensive service industries’ costs. This might cause costs to rise for anything from haircuts to vehicle repairs to hotel stays, even while prices decline for automobiles, furniture, and other commodities that experienced price increases in the previous year.