Yet another US Fed 75-basis-point rate hike

WASHINGTON, 3 Nov 2022:

The US Federal Reserve yesterday announced a new 0.75-percentage-point hike in its benchmark interest rate – the fourth consecutive increase of that magnitude – in a bid to tame high inflation.

The US central bank’s move, which was in line with economists’ expectations, raised the target range of the so-called federal-funds rate to between 3.75% and 4% – its highest level since January 2008.

That rate that banks charge each other to borrow or lend excess reserves overnight had been set at a range of between 0% and 0.25% in March 2020 in a bid to boost an economy battered by Covid-19 triggered lockdowns.

But the Fed began raising that rate in March of this year, initially moving it up by just a quarter of a percentage point but then turning much more aggressive in a bid to combat surging consumer prices.

The US’s annual inflation rate came in at 8.2% in September, near a four-decade high.

The Federal Open Market Committee (FOMC), the Fed’s policy-making body, said in a statement at the end of its latest two-day meeting that it “anticipates that ongoing increases in the target range will be appropriate” to bring inflation back to its longstanding 2% target.

It also said it will “continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities” as an additional inflation-fighting measure.

In outlining its inflation concerns, the Fed pointed to the same causes that it had mentioned after each of its meetings since March: “supply and demand imbalances related to the pandemic, higher food and energy prices and broader price pressures.”

It also reiterated “Russia’s war against Ukraine … and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”

One silver lining in the report was a new sentence that stated “in determining the pace of future increases in the target range, the Committee 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.”

Many investors and traders took that as a signal the central bank is poised to slow the pace of rate hikes, sending stock prices initially higher yesterday.

But in a press conference after the latest rate hike, Federal Reserve chairman Jerome Powell stressed the central bank still has “some ways to go” in terms of tightening monetary policy.

“Incoming data since our last (FOMC) meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

Powell’s remarks about the so-called “terminal rate,” or the peak spot in the federal-funds rate before it is lowered once again, soured the mood of US investors in late afternoon trading.

The major US stock indexes all finished lower, with the Dow Jones Industrial Average down 1.55%, the S&P 500 down 2.5% and the tech-heavy Nasdaq 3.36% lower.

Investors also were also spooked by Powell’s remarks about the difficulty in achieving a “soft landing,” whereby inflation is brought under control without the US economy falling into recession.

“Has (the window for a soft landing) narrowed? Yes. Is it still possible? Yes,” Powell said in response to a reporter’s question. “We’ve always said it was going to be difficult. But I think to the extent rates have to go higher and stay higher for longer it becomes harder.”