Local News

Fed raises rates by quarter-point and hints at more hikes

Fed raises rates by quarter-point and hints at more hikes

WASHINGTON (AP) – The Federal Reserve on Wednesday raised its key interest rate by a quarter point in its fight against high inflation, its eighth hike since March. And the Fed indicated that even though inflation is coming down, it remains high enough to warrant further rate hikes.

Although lower than its previous hikes — and even larger rate hikes before — the Fed’s latest move will raise the cost of many consumer and business loans and potentially raise recession risks.

In a statement, Fed officials reiterated language they used earlier, adding that “an ongoing increase in the (interest rate) target range would be appropriate.” This is seen as a signal that they intend to raise their benchmark rate again when they meet in March and perhaps in May as well.

The Fed hike was announced a day after the government reported Pay and benefits increase slowly for US workers In the last three months of 2022, the third straight recession. That report could help reassure the Fed that wage gains won’t lead to higher inflation.

Although the Fed suggested in its statement on Wednesday that more rate hikes were likely, it noted for the first time that pricing pressure was cooling. The statement also indicated that it would stick with modest quarter-point increases in the coming months and is considering when to eventually suspend them entirely.

But the Fed’s overall message on Wednesday was that raising rates is not done yet.

“We will need more evidence to be confident that inflation is on a long, sustained downward path,” Chairman Jerome Powell told a news conference.

READ ALSO :   Swiss National Bank exits era of negative interest rates with 0.75% hike

Powell said, “It is too early to declare victory or to think that we have actually found it.” “We have to get the job done.”

However, speculation is widespread among Wall Street investors and many economists that with inflation remaining calm, the Fed may soon decide to halt its aggressive campaign to tighten credit. When they last met in December, Fed policymakers predicted they would eventually raise their benchmark rate to a level that would require two additional quarter-point increases.

Yet Wall Street investors have priced in just one more hike. Collectively, in fact, they expect the Fed to reverse course and actually cut rates by the end of this year. That optimism has helped push stock prices up and bond yields lower, easing credit and pushing in the opposite direction the Fed would prefer.

The division between the Fed and the financial markets is important because rate hikes need to act through the markets to affect the economy. The Fed directly controls its key short-term rate. But it only has indirect control over the lending rates that people and businesses actually pay – for mortgages, corporate bonds, auto loans and many others.

Its effect can be seen in housing. The average fixed rate on a 30-year mortgage rose after the Fed started raising rates for the first time. Eventually, it rose to over 7%, more than twice where it was before the hike started.

Yet since the fall, average mortgage rates have decreased. 6.13%, the lowest level since September, And while home sales declined further in December, a measure of contracts signed to buy homes actually rose. It suggested that the lower rates may draw some home buyers back into the market.

READ ALSO :   Church overflows to light MSU victim Ariel Anderson's candle

In his news conference on Wednesday, Powell brushed off concerns that the Fed would tighten credit too much and trigger a recession.

“I still think there is a way to get inflation down to 2%,” the Fed’s target level, “without significant economic decline or a significant increase in unemployment,” he said.

Over the past several months, Fed officials have scaled down the size of their rate hikes, from four unusually large three-quarter-point hikes in a row last year to Wednesday’s quarter-point hike of half-points in December. happened.

The more gradual pace is intended to help the Fed navigate what will be a high-risk series of decisions this year. The central bank’s latest move kept its benchmark rate in a range of 4.5% to 4.75%, its highest level in nearly 15 years.

The slowdown in inflation suggests that its rate hike has begun to achieve its target. But inflation is still well above the central bank’s 2% target. The risk is that ever-higher borrowing costs could push the economy into recession later this year, with some sectors of the economy weakening.

For example, retail sales have fallen for two months in a row, indicating that consumers are becoming more cautious about spending. Manufacturing output has fallen for two months. On the other hand, the country’s job market – the most important pillar of the economy – remains strong, with the unemployment rate at a 53-year low of 3.5%.

The Fed’s latest policy statement indicated that the central bank no longer views COVID-19 as a driver of higher prices. It dropped reference to the pandemic from its statement as a cause of supply shocks, which have pushed up inflation.

READ ALSO :   Billionaire investor Ken Griffin says US recession is inevitable - and Fed needs to stick to its guns to reset inflation

Over the past year, businesses have raised wages sharply to try to attract and keep enough workers, with Powell expressing concern that wage increases in the labor-intensive service sector will keep inflation too high. Businesses typically pass on their increased labor costs by charging higher prices to their customers, thereby maintaining inflationary pressures.

But recent estimates suggest wage growth is slowing. And in December, overall inflation eased to 6.5% in December from a year earlier, down from a four-decade high of 9.1% in June. The decline has been partly driven by cheaper gas, which has fallen $3.50 per gallon, on averageNationwide, from $5 in June.

The supply chain backup has also been cleared to a large extent, leading to a drop in the prices of manufactured goods. Used car prices, which skyrocketed in the pandemic amid an auto shortage, have fallen for several months now.

Other major central banks are also battling high inflation with rate hikes. The European Central Bank is expected to raise its benchmark rate by half a point when it meets on Thursday. In Europe, inflation remains high despite slowing. at 8.5% in January compared to a year ago.

The Bank of England is also expected to raise its rate at a meeting on Thursday. Inflation in the United Kingdom has reached 10.5%. The International Monetary Fund has predicted that the UK economy is likely to enter recession this year.

The Latest

To Top