Fed Increases Rate by a Quarter Point and Indicates Future Increases

With its ninth increase since March, the Federal Reserve increased its benchmark interest rate by a quarter percent on Wednesday.

Additionally, the Fed indicated that even while inflation is declining, it is still high enough to warrant additional rate increases.

The Fed’s most recent action will probably further boost the costs of many consumer and company loans and the danger of a recession, even if it was smaller than its last hike and far greater rate hikes before that.

Ongoing hikes in the (interest rate) target range will be appropriate, Fed officials said in a statement, repeating language they have used since March.

This is interpreted as a signal that they aim to raise their benchmark rate again when they meet next in March.

One day after the government revealed that American employees’ wages and benefits increased more slowly in the final three months of 2022—the third consecutive slowdown—the Fed announced its increase.

That report might assist in assuring the Fed that rising wages won’t lead to increased inflation.

The Fed highlighted that price pressures are moderating for the first time, even though it included language in its statement indicating that additional rate hikes are on the horizon.

“Inflation has reduced marginally but remains elevated,” it was reported.

The statement also suggested that it is debating whether to stop raising rates eventually and will likely keep moderating quarter-point hikes in the upcoming months.

Wall Street investors and many economists are speculating widely that the Fed will soon decide to stop its aggressive campaign to tighten credit because inflation is still down.

When they last met in December, the Fed’s officials anticipated that they would eventually raise their benchmark rate to a level requiring two additional quarter-point hikes.

However, Wall Street investors have only factored in one additional increase.

They genuinely anticipate the Fed to change course and decrease rates by the end of this year as a group.

This confidence has contributed to rising stock prices and falling bond yields, which has lowered borrowing costs and moved the economy away from the Fed’s preferred course.

Because rate hikes must pass through markets to impact the economy, the gap between the Fed and financial markets is crucial.

The critical short-term rate is directly under Fed control.

However, it only has indirect power over the actual borrowing rates that individuals and companies pay for mortgages, corporate bonds, auto loans, and many other types of borrowing.

The housing market has been affected as a result. After the Fed started raising rates, the typical fixed rate for a 30-year mortgage skyrocketed, and it eventually reached 7%, doubling where it had been before the hike.

The average mortgage rate has decreased since the collapse, however, to 6.13%, the lowest level since September. And even if home sales further reduced in December, several contracts to buy homes were inked.

The Fed’s officials have scaled back the number of their rate hikes over the past few months, from last year’s four exceptionally hefty three-quarter-point raises in a row to a half-point boost in December to this week’s quarter-point hike.

The slower pace is meant to assist the Fed in navigating this year’s high-risk decision-making process.

The slowing in inflation indicates that the rate hikes are beginning to have an impact.

However, inflation measurements remain much higher than the central bank’s 2% target.

Ever-rising borrowing prices risk pushing the country into a recession later this year as some economic sectors deteriorate.

For instance, retail sales have decreased for two consecutive months, indicating consumers are becoming more cautious about spending.

According to the Fed’s announcement, COVID-19 is no longer seen as a cause of rising pricing.

A mention of the pandemic as the cause of supply disruptions that increased inflation was deleted from its statement.

Additionally, it omitted any mention of “public health” as one aspect it will consider when determining its next moves.

Powell has expressed concern that wage growth in the labor-intensive service sector will maintain inflation too high in light of businesses’ recent significant pay increases to recruit and retain adequate workers.

Businesses often increase their pricing to reflect their increasing labor expenses, which feeds inflationary pressures.