WASHINGTON (AP) – The Federal Reserve raised interest rates by three-quarters point for the fourth consecutive day on Wednesday in a bid to combat high inflation, but indicated it may soon scale back the scope of its rate hikes.
The Fed’s move raised its short-term interest rate to a range of 3.75% to 4%, its highest level in 15 years. It was the central bank’s sixth rate hike this year — a streak that has made mortgages and other consumer and business credit increasingly expensive and increased the risk of a recession.
But in a statement after its last monetary policy meeting, the Fed hinted that it may soon switch to a more deliberate pace of rate hikes. It said it would consider the cumulative impact of its large rate hikes on the economy in the coming months. It noted that its rate hikes will take time to fully impact growth and inflation.
Those words suggested Fed policymakers might think borrowing costs are getting high enough to potentially slow the economy and reduce inflation. If so, it would suggest that they may not need to raise rates as quickly as they have.
For now, however, persistently inflated prices and higher borrowing costs are putting pressure on American households and have undermined the Democrats’ ability to champion the health of the job market while trying to retain control of Congress. Republican candidates have been hammering Democrats on the punitive effects of inflation ahead of the midterm elections, which will end Tuesday.
Speaking at a press conference, Chairman Jerome Powell avoided sending a clear signal as to whether the next expected Fed rate hike in December could be just half a point instead of three-quarters. He tried to stress that the central bank will continue to hike interest rates in the coming months, possibly to higher levels than forecast in September.
“We still have a long way to go,” Powell said. “And the data coming in since our last meeting suggests” that policymakers may need to raise rates more than they previously thought.
Typically, the Fed hikes rates in quarter-point increments. But after downplaying inflation last year as likely temporary, Powell has prompted the Fed to raise rates aggressively to try to slow borrowing and spending and ease price pressures.
Wednesday’s rate hike coincided with growing concerns that the Fed could cut lending enough to derail the economy. The government has reported that the economy has grown in the last quarter and employers are still hiring at a solid pace. But the housing market has collapsed and consumers are barely increasing their spending.
The average interest rate on a 30-year fixed-rate mortgage, which was just 3.14% a year ago, topped 7% last week, mortgage buyer Freddie Mac reported. Existing home sales have declined for eight consecutive months.
Blerina Uruci, economist at T. Rowe Price, suggested that falling home sales are “the canary in the coal mine,” showing that the Fed’s rate hikes are weakening a highly rate-sensitive sector like housing. However, Uruci noted that the Fed’s rate hikes have not yet significantly slowed the rest of the economy, particularly the labor market or consumer demand.
“As long as those two components remain strong,” she said, “Fed policymakers cannot expect inflation to fall anywhere near their 2% target within the next two years.”
Several Fed officials have recently said they are yet to see any significant progress in their fight against rising costs. Inflation rose 8.2% in September from 12 months earlier, just below the highest rate in 40 years.
Still, policymakers may feel they may slow the pace of their rate hikes soon as some early signs suggest inflation may be slowing in 2023. Consumer spending, depressed by high prices and more expensive credit, is barely growing. Supply chain problems ease, resulting in fewer shortages of goods and parts. Wage growth is stagnating, which would reduce inflationary pressures if followed by declines.
Still, the job market remains consistently strong, which could make it harder for the Fed to cool the economy and contain inflation. This week, the government reported that companies posted more job vacancies in September than in August. There are now 1.9 jobs for every unemployed person, an unusually large supply.
Such a high ratio means employers are likely to continue increasing wages to attract and retain workers. These higher labor costs are often passed on to customers in the form of higher prices, further fueling inflation.
Ultimately, economists at Goldman Sachs expect Fed policymakers to hike interest rates to nearly 5% by March. That’s higher than what the Fed itself had predicted in its previous guidance in September.
Outside the United States, many other major central banks are also rapidly raising interest rates to try to lower inflation levels, which are even higher than in the US
Last week, the European Central Bank announced its second straight jumbo rate hike, raising rates at the fastest pace in the history of the euro currency to try to stem inflation, which rose to a record 10.7% last month was.
Likewise, the Bank of England is expected to hike interest rates on Thursday in an attempt to bring consumer prices down to 10.1% in September, which have risen at their fastest pace in 40 years. Even as they raise interest rates to fight inflation, both Europe and the UK appear to be sliding towards recession.