Fed approves 0.75 point hike to take rates to highest since 2008, hints at policy change to come

The Federal Reserve on Wednesday approved a fourth consecutive three-quarter point interest rate hike and signaled a potential change in how it will approach monetary policy to reduce inflation.

In a well-telegraphed move that markets had been waiting for weeks, the central bank raised its short-term borrowing rate by 0.75 percentage points to a target range of 3.75% to 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 was this high.

In addition to pricing in the rate hike, markets were also looking for language that it could be the latest move of 0.75 points, or 75 basis points.

The new statement alludes to this policy shift, saying 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 policy “cut,” which could lead to a half-point rate hike at the December meeting and then some more modest hikes in 2023.

This week’s statement also expanded on previous language by simply stating that “continued increases in the target range will be appropriate.”

The new wording read: “The Committee anticipates that continued increases in the target range will be appropriate to achieve a monetary policy stance tight enough to bring inflation down to 2% over time.”

Markets will look to Chairman Jerome Powell’s 2:30 p.m. press conference for clarity on whether the Fed thinks it can implement less restrictive policy that would include a less dramatic level of rate hikes for achieve its inflation targets.

Along with the statement change, the FOMC again called spending and output growth “modest” and noted that “jobs gains have been robust in recent months” while inflation is “ high”. The statement also reiterated wording that the committee is “very attentive to inflation risks.”

The rate hike comes as recent inflation readings show prices remaining near 40-year highs. A historically tight job market in which there are nearly two jobs for every unemployed worker is driving up wages, a trend the Fed is seeking to counter by tightening the money supply.

Concerns are growing that the Fed, in its effort to drive down the cost of living, will also drag the economy into recession. Powell said he still sees the path to a “soft landing” in which there is no severe contraction, but the U.S. economy has seen virtually no growth this year, even though the full impact rate hikes have not yet taken place.

Meanwhile, the Fed’s preferred measure of inflation showed the cost of living rose 6.2% in September from a year ago – 5.1% even excluding food costs and energetic. GDP fell in the first and second quarters, meeting a common definition of a recession, although it rebounded to 2.6% in the third quarter, mainly due to an unusual rise in exports. At the same time, house prices have plunged, with 30-year mortgage rates rising above 7% in recent days.

On Wall Street, markets rallied in anticipation that the Fed may soon begin to ease as concerns grow over the longer-term impact of the rate hike.

The Dow Jones Industrial Average has gained more than 13% in the past month, partly due to an earnings season that hasn’t been as bad as expected, but also amid growing hopes of a recalibration of Fed policy. Yields on Treasury bills have also moved off their highest levels since the early days of the financial crisis, although they remain elevated. The 10-year benchmark was most recently around 4.04%.

There’s little to no expectation that rate hikes will stop anytime soon, so the anticipation is just at a slower pace. Futures traders are pricing in a near-instantaneous chance of a half-point rise in December, against another three-quarter-point move.

Current market prices also indicate that the fed funds rate will reach close to 5% before the end of rate hikes.

The federal funds rate sets the level that banks charge each other for overnight loans, but ripples through many other consumer debt instruments such as variable rate mortgages, auto loans and credit cards. credit.

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