The Federal Reserve on Wednesday approved a fourth consecutive three-quarter point interest rate increase and signaled a potential change in how it will approach monetary policy to bring down inflation.
U well-telegraphed move that markets had been expecting for weeks, the central bank raised its short-term borrowing rate by 0.75 percentage point to a target range of 3.75%-4%, the highest level since January 2008.
The move continued the most aggressive pace of monetary policy tightening since the early 1980s, the last time inflation ran this high.
Along with anticipating the rate hike, markets also had been looking for language indicating that this could be the last 0.75-point, or 75 basis point, move.
The nova izjava hinted at that policy change, saying when determining future hikes, the Fed “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.”
Economists are hoping this is the much talked about “step-down” in policy that could see a rate increase of half a point at the December meeting and then a few smaller hikes in 2023.
Changes in policy path
Stocks initially rose following the announcement, but turned negative during Predsjedavajući Jerome Powell's konferencija za novinare as the market tried to gauge whether the Fed thinks it can implement a less restrictive policy that would include a slower pace of rate hikes to achieve its inflation goals.
On balance, Powell dismissed the idea that the Fed may be pausing soon though he said he expects a discussion at the next meeting or two about slowing the pace of tightening.
He also reiterated that it may take resolve and patience to get inflation down.
“We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” he said.
Still, Powell reiterated that there may come a time to slow the pace of rate increases.
“So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made,” he said.
Soft landing path narrows
However, he said the need for still-higher rates makes the job more difficult.
“Policy needs to be more restrictive, and that narrows the path to a soft landing,” Powell said.
At the same time, the Fed’s preferred inflation measure showed the cost of living rose 6.2% in September from a year ago – 5.1% even excluding food and energy costs. GDP declined in both the first and second quarters, meeting a common definition of recession, though it rebounded to 2.6% in the third quarter largely because of an unusual rise in exports. At the same time, housing demand has plunged as 30-year mortgage rates have soared past 7% poslednjih dana.
On Wall Street, markets have been rallying in anticipation that the Fed soon might start to ease back as worries grow over the longer-term impact of higher rates.
The Dow Jones Industrial Average has gained more than 13% over the past month, in part because of an earnings season that wasn’t as bad as feared but also due to growing hopes for a recalibration of Fed policy. Prinosi riznice also have come off their highest levels since the early days of the financial crisis, though they remain elevated. The benchmark 10-year note most recently was around 4.09%.
There is little if any expectation that the rate hikes will halt anytime soon, so the anticipation is just for a slower pace. Futures traders are pricing a near coin-flip chance of a half-point increase in December, against another three-quarter point move.
Current market pricing also indicates the fed funds rate will top out near 5% before the rate hikes cease.
The fed funds rate sets the level that banks charge each other for overnight loans, but spills over into multiple other consumer debt instruments such as adjustable-rate mortgages, auto loans and credit cards.
Source: https://www.cnbc.com/2022/11/02/fed-hikes-by-another-three-quarters-of-a-point-taking-rates-to-the-highest-level-since-january-2008.html