The Federal Reserve stepped up its battle against inflation on Wednesday with another big interest rate hike as central bank efforts plunge the United States into a recession.
The Fed raised its base interest rate range by 0.75 percentage points for the fourth time in four straight meetings. The rate hike was the sixth of the year and brought the Fed’s base interest rate range to a range of 3.75 to 4%.
And while the rate hikes marked another aggressive move to reduce inflation — which has remained stubbornly high for months — the Federal Reserve adopted a slightly softer tone in its messaging about its future actions.
The bank’s approach to containing demand, however, will still be determined largely by upcoming reports on consumer prices and the resilience of the US labor market.
Here are five key takeaways from the Fed’s rate hikes.
Rate hikes will taper off, but they won’t go away anytime soon
The Fed quickly raised interest rates in hopes of pushing up borrowing costs enough to slow the economy. The central bank has raced to that point with a series of massive rate hikes, raising its base interest rate range by 3.75 percentage points since March.
Fed officials said that with clear signs of a slowing economy, it will soon be time for the bank to raise rates in smaller increments, such as 25 or 50 basis points.
Fed Chairman Jerome Powell said that point could come as soon as the central bank’s next policy meeting in December.
But he made it clear that the Fed will continue to raise interest rates and cannot afford to think of stopping them with inflation still three times higher than the bank’s 2% annual target.
“It is very premature, in my opinion, to think that we are talking about pausing our rate hikes. We have a long way to go,” Powell said at a press conference on Wednesday.
“We need continued rate hikes to get to this sufficiently restrictive level [interest rates] and we don’t know, of course, we don’t know exactly where it is,” he continued.
The Fed sees the economy slowing but the labor market is holding up
Fed officials said on Wednesday they were paying more attention to how rising interest rates, stubbornly high inflation and headwinds from Ukraine have begun to weigh on the U.S. economy. .
In his remarks, Powell cited several signs of a slowing economy, including a slowing housing market, declining business investment and a plateau in economic growth so far this year.
The economic slowdown is one of the expected effects of the Fed’s rate hikes, which aim to force households and businesses to spend less money and stop pushing up the prices of goods and services.
Even so, Powell said the resilience of the job market is one of many factors that keep Americans spending money in the face of inflation.
And while he didn’t name rapid wage growth as the main cause of inflation, Powell argued that intense labor demand and a shortage of new workers were keeping prices under pressure. .
“The bigger picture is an overheated labor market where demand significantly outstrips supply,” Powell said.
“We’re continuing to look for signs that some sort of gradual onset of softening is happening, and maybe it’s there, but it’s not obvious to me.”
Americans will be hit by high interest rates
Powell said Wednesday that the Fed will have to push its base interest rate even higher than officials expected in September.
That means the central bank may need to raise the midpoint of its target range to 5% or more before it halts and keeps rates high for months.
“The inflation picture has gotten more and more difficult over the year, no doubt about it,” Powell said. “It means we have to have a more restrictive policy and it has reduced the window for a soft landing.”
Americans will see the direct impacts in higher mortgage ratescredit card rates and other variable rate loans.
Mortgage rates fell slightly ahead of the rate hike, according to data released Wednesday by the Mortgage Bankers Association, with the 30-year fixed rate mortgage rate falling to 7.06% from 7.16 the previous week. But effective mortgage rates still climbed to more than 7%, from 4.2% in March and their pandemic low of 2.7%.
A recession will be harder to avoid
Powell acknowledged on Wednesday that the chances of avoiding a recession were diminishing, with inflation remaining well above the annual target.
Prices have risen 6.2% over the past 12 months, according to the Personal Consumption Expenditure Price Index, the Fed’s preferred gauge of inflation.
With inflation so high, Powell conceded that the Fed would have to raise interest rates higher than it expected in September, which would put even slower pressure on the economy.
“Nobody knows if there is going to be a recession or not, and if so, how bad that recession would be. Our job is to restore price stability so that we can have a strong labor market that benefits everyone. over time,” Powell said.
Global unrest will not be a deterrent
In recent months, the central banks of some of the wealthier countries have sought to take deflationary measures by raising interest rates.
These efforts, including those of the United States, have drawn backlash from global policymakers and the United Nations, warning that interest rate hikes will have adverse effects on developing economies that lack resilient labor markets.
When the Fed raises interest rates, the value of the US dollar against other currencies increases.
This puts pressure on other central banks to raise interest rates while making American goods and services much more expensive abroad.
Powell said the Fed was mindful of how headwinds in the global economy could affect the U.S. economy, but said the central bank would not ignore its legal mandate to keep the domestic economy strong. .
“The world won’t be better off if we don’t. It is a task that we must accomplish. Stability and price stability in the United States is good for the global economy over a long period,” he said.