Federal Reserve Chairman Jerome Powell attends the International Monetary and Financial Committee meeting in Washington DC in October. 14. Powell announced another rate hike Wednesday.
JIM WATSON/AFP via Getty Images
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JIM WATSON/AFP via Getty Images
Federal Reserve Chairman Jerome Powell attends the International Monetary and Financial Committee meeting in Washington DC in October. 14. Powell announced another rate hike Wednesday.
JIM WATSON/AFP via Getty Images
federal reserve ordered another massive increase in interest rates He warned on Wednesday that rates would have to rise even higher to contain stubbornly high inflation.
The central bank increased the benchmark interest rate by 3/4 percent. The rate, which was close to zero in March, has increased by 3.75 points in the last eight months. This is the most aggressive series of rate hikes in decades, but so far little has been done to curb inflation.
“Interest rates have risen at a bullring pace and we’re not done yet,” said Greg McBride, chief financial analyst at Bankrate. It will take some time for inflation to come down from these highs, even once we start seeing improvement.”
In September, annual inflation was 6.2%, According to the Fed’s preferred benchmark – unchanged compared to the previous month. The better-known consumer price index shows that prices are rising even faster at an annual rate of 8.2%.
Fed chairman Jerome Powell warned that taming such severe inflation would likely require higher interest rates than he and his colleagues had anticipated just two months ago.
“What I’m trying to do is make sure our message is clear,” Powell told reporters on Wednesday. “We have some ground to close interest rates before they get to what we think is restrictive enough,” he said.
At the same time, Powell said the pace of rate hikes could soon slow as policymakers assess the impact of higher borrowing costs on the economy.
“The time is coming, and it may come at the next meeting or the meeting after that,” Powell said.
Stocks initially rallied with hints of smaller rate hikes in December or January, but soon fell in anticipation that rates should rise further. The Dow Jones Industrial Average fell more than 500 points, or 1.55%. The broader S&P 500 index fell 2.5 percent.
McBride argues that borrowing costs probably need to stay high for a long time to keep inflation down.
“The mantra for 2023 is ‘higher for longer’,” he said. “Once inflation is at 6.7.8 percent and the target is 2 percent, it will take some time.”
Even if inflation stays under control, rate hikes are effective
Higher borrowing costs have already taken a huge hit on the housing market. Andes Mountains other parts of the economy are starting to slow down. However, consumers who are still in the same situation with the cash they saved at the beginning of the pandemic continue to spend money. As a result, the Fed may need to hit the brakes harder for longer than usual.
“Today, we see some savings buffer for households that allows them to continue spending in a way that keeps demand strong,” said Esther George, Chairman of the Kansas City Federal Reserve Bank. “This shows that we may need to stay on this for a while.”
Like his colleagues on the Fed’s rate-setting committee, George has expressed a determination to control inflation. But he also warned against raising rates too quickly during a time of economic uncertainty.
“I’ve been in a more stable and slower camp. [rate increases]To begin to see how the effects of the delay will unfold,” George said last month, “My concern is that very large consecutive rate hikes may cause you to overeat and fail to see these turning points.”
With Polls showing inflation are the biggest concern among votersThe Biden administration and most members of Congress stayed out of the way of the Fed as it tried to control prices. But a handful of Democrats have begun to challenge the central bank’s approach, warning that aggressive rate hikes could put millions out of work.
“We are deeply concerned that your rate hikes risk slowing the economy while failing to slow rising prices that continue to hurt families,” the Senator said. Elizabeth Warren, D-Mass. and colleagues wrote: Letter to Fed Chairman Jerome Powell on Monday.
Housing market already creeping slow mortgage rates top 7% for the first time in two years.
Kansas City home builder Shawn Woods said his company stopped selling a dozen homes a month before the Fed began raising interest rates below five.
“In my wildest dreams I never thought we would go above 3%. [mortgage rates] “It rose to 7% in six months,” said Woods, president of Ashlar Homes and the Kansas City Home Builders Association.
“I think we’ve been here for a tough six or eight months,” Woods said. “Typically, housing takes us into recession and takes us out of recession. And I think from a housing perspective, we’ve probably been in a housing recession since March or April.”
Powell said that despite the negative effects of rising interest rates, the central bank has a responsibility to contain inflation.
“No one knows if there will be a recession, and if so, how bad it will be,” Powell said. “Our job is to restore price stability so that we can have a strong labor market that benefits everyone over time.”
