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The Federal Reserve approved another consecutive rate hike on Wednesday, one of the latest and necessary measures to fight inflation.
The hike
The Federal Reserve approved another consecutive rate hike of three-quarters of a percentage point.
The rate hike brings the central bank’s average policy rate to a new range from 3.75% to 4%.
The latest hike is the highest interest rate in over a decade, going as far back as January 2008.
The Fed’s rate hike is the latest aggressive attempt to try to curb the inflation plaguing the US economy.
The decision
The Wednesday decision arrives after the Federal Open Market Committee’s two-day policy meeting.
Additionally, it marks the Federal Reserve’s most challenging policy move since the 1980s.
The decision threatens to worsen the economic pain for millions of US businesses and households by increasing the cost of borrowing.
Furthermore, it could potentially trigger a recession.
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Soft landing
In a press conference following the meeting, Federal Reserve Chairman Jerome Powell acknowledged that the road to a soft landing was narrowing.
Despite the challenge, he assures people that a soft landing is still possible.
Soft landings are a process of cooling the economy while simultaneously avoiding a recession.
“The inflation picture has become more and more challenging over the course of this year,” said Powell.
“That means we have to have policy be more restrictive, and that narrows the path to a soft landing.”
Jerome Powell reiterated his commitment to curb inflation.
Furthermore, he said continued inflation would cause more economic suffering than a recession.
New language
The Fed’s November statement included a new section added by officials, which surprised many.
The Federal Reserve generally repeats the same language with each release.
In its latest statement, the Federal Open Market Committee assumes that further increases in the target range are needed for monetary policy guidance.
Monetary policy is tight in an attempt to bring inflation down to 2% eventually.
Fed watchers might speculate that raising the inflation target “over time” would have fewer negative consequences.
Moreover, it could mean that the Fed would revert from aggressive rate hikes to lower rate hikes in the long run.
The statement further stated:
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Cooling economy
The new language also allows for lower interest rates and recognizes that monetary policy can cool the economy.
Despite the economic data exhibiting strong growth, the cooling economy appears to be working.
Wall Street may also acknowledge the new language as a response to criticism that the Fed is over-correcting with high rate hikes that could hurt the economy.
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Markets
Recent data shows that mortgage rates are reaching unprecedented levels last seen 20 years ago.
Additionally, they are starting to weigh on the housing market.
New home sales in September were 10.9% lower than in August and 17.6% lower than in 2021.
Fortunately, inflationary pressures are also easing.
Wages rose 1.2% in the third quarter, compared to 1.6% in the second quarter.
Despite the changes, the labor market remained tight.
The number of vacancies rose to 1.9 vacancies per available employee in September.
Friday’s jobs report is expected to show the economy will add 200,000 jobs in October.
Although lower than last month, the number is still at an all-time high.
Reference:
The Fed makes history with a fourth straight three-quarter-point rate hike
