Fed hikes rates by 0.75 points again — but signals smaller increases ahead

The Federal Reserve imposed another super-charged interest rate hike Wednesday, but officials signaled a move to smaller increases is in store as fears mount that inflation-fighting efforts will prompt a recession.

The rate-making Federal Open Market Committee hiked its benchmark rate by three-quarters of a percentage point following a two-day meeting. The latest hike moved the Fed’s target funds rate range to between 3.75% and 4% — the highest since 2008.

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During his post-meeting conference, Fed Chair Jerome Powell signaled the central bank could begin dialing back the pace of its increases as soon as its next meeting, which is slated for mid-December.

“That time is coming and it may come as soon as the next meeting or one after that,” Powell said. “No decision has been made. It’s likely we’ll have a discussion about this at the next meeting.”

Powell added that recent data points, including a strong jobs report and worse-than-expected inflation report in September, indicated the Fed could ultimately hike its benchmark rate to “higher levels than we thought at the time of the September.”

Federal Reserve Board Chairman Jerome Powell.
Fed Chair Jerome Powell announced another rate hike Wednesday, marking the highest target funds rate range since 2008..
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“We still think there’s a need for ongoing rate increases and we have some ground left to cover here, and cover it we will,” Powell said. He later added it would be “very premature” to consider a complete pause in rate hikes.

Investors were initially receptive to the Fed’s softening language, but stocks began to fall as Powell signaled a full pivot was not under consideration.  

The Dow Jones Industrial Average fell more than 200 points during Powell’s press conference after spiking nearly 400 points earlier in the afternoon. It was down more than 500 points, or 1.6%, at the close. The tech-heavy Nasdaq and the broad-based S&P 500 tumbled 3.4% and 2.5%, respectively.

Powell and other policymakers have indicated for months they will hike interest rates into the restrictive territory and hold them there until inflation begins to decline.

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But investors are watching closely for signs that the Fed will soften its policy stance due to a weakening economy.

The Fed chairman acknowledged that financial conditions have “tightened significantly” in response to the rate hikes – and noted the housing sector has “weakened significantly” due to higher mortgage rates.

Federal Reserve
The Federal Reserve has implemented several sharp rate hikes this year.
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Despite the slowdown, Powell argued the Fed’s policy stance has been effective thus far.

“I don’t think we’ve overtightened,” Powell said. “I think it’s very difficult to make the case that our current level is too tight, given that inflation still runs well above the federal funds rate.”

The latest interest rate hike was in line with the market’s expectations. Hours before the Fed’s announcement on Wednesday morning, investors were pricing in an 88% probability of a three-quarter percentage point hike and a roughly 12% probability of a smaller half-point hike.

The Fed’s current projections call for another half-point hike at their two-day meeting in mid-December – with more increases expected in early 2023.

The updated language in the FOMC’s statement is a “clear signal that wave of [0.75%] hikes is over” unless upcoming inflation and jobs reports are “unexpectedly awful,” according to Pantheon Macroeconomics chief economist Ian Shepherdson.

People shopping for food.
The latest Consumer Price Index data for October will be released next week.
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“We don’t expect that, so we think markets now will gravitate towards a 50bp hike in December,” Shepherdson said. “We’re not ruling out 25bp, if the data cooperate, but whatever happens in December, we doubt the Fed will be hiking again next year.”

Changes to the benchmark interest rate have major implications for the broader economy, affecting credit card interest rates, auto loans, savings accounts, and more.

“It has been a cruel summer and fall for credit cardholders, and unfortunately we’re likely headed to a winter of discontent as interest rates continue to rise and inflation remains high,” said Matt Schulz, chief credit analyst at LendingTree.

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Mortgage rates also spike in response to tightened Fed policy, as evidenced by this year’s surge of about 7% for a 30-year fixed-rate mortgage.

As The Post has reported, demand in the US housing market has collapsed as mortgage rates rise, forcing many sellers to slash their asking prices in an effort to entice buyers.

“The lagged effect of all these interest rate hikes means a rapidly slowing economy in 2023,” said Bankrate Chief Financial Analyst Greg McBride. “The abrupt slowdown in the housing market is a harbinger of broader economic slowing to come.”

Federal Reserve
The Federal Reserve is aiming to cool inflation through interest rate hikes.
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The Fed has now hiked by three-quarters of a point for the fourth consecutive meeting – an abnormally sharp pace highlighting the pressure officials face to bring down prices. Prior to this year, the central bank hadn’t implemented a hike of that size since 1994.

Inflation ran at a hotter-than-expected 8.2% in September as sharp increases in grocery and housing prices hammered US households. The latest Consumer Price Index data for October will be released next week.

The Fed’s response to inflation has drawn a polarizing response. Ex-Treasury Secretary Larry Summers warned the Fed this week against making a “dovish pivot” too soon.

“Although market participants anxiously await the end of the Fed’s rate hike cycle, they do not want the Fed to pause long enough to allow inflation to continue to build and leave an economic underpinning of stagflation,” LPL Financial strategists said in a note to clients this week.

Inflation hit 8.2% in September.
Bloomberg via Getty Images

Meanwhile, Wharton professor Jeremy Siegel asserted the Fed risks causing depression with more rate hikes. Concerns about Fed “oversteering” are also shared by San Francisco Fed President Mary Daly, who warned last month that officials needed to avoid an “unforced downturn” in the economy.

“We have to make sure we are doing everything in our power not to over-tighten, and we can’t pull up too fast, and say we are done,” Daly said, according to Reuters.

A recent Bloomberg Economics forecast model set the probability of a recession within the next 12 months at 100%.

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