The Federal Reserve on Wednesday launched another outburst against inflation the fastest in four decades, approving the fourth straight increase in supersized rates and signaling that more increases were likely in the coming months.
Fed officials agreed on Wednesday to raise the benchmark federal funds rate by three-quarters of a percentage point to a range between 3.75 and 4%, the highest since January 2008. That was what s were waiting for forecasters and financial markets. This is the fourth consecutive increase of 75 basis points.
The Fed’s statement pointed to more hikes to come, but appeared to leave room for the Fed to slow the pace of rate hikes in upcoming meetings as the Fed monitors the delayed effects of rate hikes already enacted.
“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.” , said the Federal Open Market Committee. said.
Stock markets saw this as a softening of the Fed’s stance, pushing stock prices higher in the market’s immediate reaction to the announcement. The dollar, which has strengthened against foreign currencies as interest rates have risen, has fallen.
Information released after the November meeting of the Federal Open Market Committee did not include new economic projections. At the September meeting, the economic forecast summary showed that almost all Fed officials expect the benchmark to be between 4% and 4.5% by the end of this year. year, which would mean another rate hike at the December meeting.
Economists are divided on the magnitude of the Fed’s next move. Analysts from UBS, Credit Suisse, Nomura and Deutsche Bank predict a further rise of three-quarters of a percentage point. Analysts at Goldman Sachs, Morgan Stanley and Bank of America see a half-point hike announced at the December meeting. Prices for fed funds futures, a derivative that allows traders to speculate on future moves by the Fed, imply equal odds of every size move.
Fed officials have tried to send the message that they are determined to control inflation in the short term. Many investors were once convinced the Fed would change direction next year if the economy crashed, a move widely described as a pivot. In a series of speeches over the past few months, including Fed Chairman Jerome Powell’s press briefing after the September meeting and his presentation at a monetary policy conference in Jackson Hole, Wyoming in August , Fed officials have dismissed the market from this view by making it clear that they are willing to accept a slowdown if that proves to be the price to pay to bring inflation back to their 2% target. .
These efforts effectively changed what market participants now mean when they say the Fed will “pivot.” This word now describes the Fed reducing the magnitude of its rate hikes to half a percentage point, or 50 basis points, then to a quarter of a percentage point before finally stopping the hikes. Powell and others cautioned the market against interpreting a downturn as preceding an imminent rate reversal or that the ultimate target rate where the Fed suspends increases will be lower.
“By reaffirming September’s median path for policy rates, reiterating the FOMC’s consensus view that risks to the inflation outlook still reside on the upside, and emphasizing the willingness to err on the side of tightening too much rather than ‘by tightening too little, we think the Fed can successfully fend off any interpretation that a slower pace of rate hikes implies a lower terminal rate or a more rapid pivot to rate cuts. In other words, it is now about the destination, not the journey,” wrote a team of Bank of America economists led by Michael Gapen in a note to clients last week.
Ahead of the September meeting, stock markets rallied after each of the Fed’s interest rate announcements this year as investors repeatedly decided that Powell appeared to be signaling a softer approach. At his press conference in late September, Powell avoided giving that impression, and major stock indexes fell. October, however, saw a massive rally in stocks, with the Dow Jones Industrial Average having the best month since 1976 and the best October since 1901. Rising stock prices are easing financial conditions, making the Fed’s tightening tasks still more difficult. This is sometimes described as the market fighting the Fed.
Inflation began to pick up in March 2021 as demand grew as the economy reopened and the Biden administration launched another round of aggressive government stimulus.
Many have rightly called the explosion of rapidly rising prices Bidenflation. During the election campaign, Biden officials had claimed that Donald Trump had left the economy “ruined” by “hustling” the response to the pandemic. In fact, the U.S. economy had fared much better than its European and Japanese counterparts, thanks in large part to aid packages put in place by the Trump administration and supported on a bipartisan basis in Congress. In order to claim credit for the recovery that was already underway — and, more importantly, to deny the Trump administration credit for the recovery — the Biden administration pushed through the US bailout stimulus package from $1.9 trillion, even though prominent Democratic economists such as Larry Summers warned it would cause the economy to overheat.
Even when inflation started to heat up, the Biden administration played down the risks. “Nobody is suggesting that runaway inflation is on its way. No serious economist,” Biden said in July 2021. Inflation had pushed the consumer price index up 5.4% from a year earlier. A year later, prices would be up 8.5% above those levels, the fastest rate of inflation in decades.
A Federal Reserve Bank of San Francisco report released in March this year confirmed that this fiscal expansion was partly responsible for the high inflation. “Fiscal support measures designed to counter the severity of the economic effect of the pandemic may have contributed to this divergence by raising inflation by around 3 percentage points by the end of 2021,” the economists wrote. Oscar Jordana, Celeste Liu, Fernanda Nechio and Fabian Rivera-Reyes. .
Fed officials initially believed inflation was likely a brief episode tied to what they called “transient” factors, such as disrupted supply chains and labor market participation. weaker. As a result, they kept interest rates low for fear of killing the recovery by raising too soon. It also contributed to inflation and probably encouraged even more deficit spending by allowing the government to borrow at extremely low rates. Now Fed officials recognize that was a mistake and have frantically hiked rates in hopes of preventing inflation from taking further root in the economy.
Recent data indicates that the Fed’s efforts so far have had mixed results. The housing market, which is very sensitive to changes in interest rates because most homes are purchased with mortgages, has entered what builders and real estate agents are calling a recession. The labor market, however, showed few signs of rebalancing. Monthly employment growth was very strong and the unemployment rate extremely low. This week, government data showed the ratio of job vacancies to unemployed fell back to 1.9 to one, well above the normal rate of one to one. The labor market therefore remains extraordinarily tight.
According to today’s publication, there are now 1.9 job vacancies for every unemployed person. That’s slightly looser than the 2.0 ratio earlier this year, but just barely.
This level of tightness in the labor market is consistent with continued rapid nominal wage growth and high inflation. pic.twitter.com/n2Y81mgNi6
—Jason Furman (@jasonfurman) November 1, 2022
The month-over-month inflation figures were not promising. Inflation fell in April and again in July, only to pick up in the following months. Core inflation measures suggest that inflationary pressures remain extraordinarily strong and are likely to persist. The Cleveland Fed’s inflation nowcast for October sees the consumer price index rising 0.76% for the month, which would be a sharp acceleration from the 0.4% recorded in September. He sees core inflation, which excludes food and energy prices, at 0.54%, slightly lower than the previous month’s 0.58%.
The American left has begun to push back against the Fed’s inflationary battle. Senate Banking Committee Chairman Sherrod Brown (D-OH) recently wrote a letter to Jerome Powell warning the Fed against “excessive tightening.” Former Fed economist Claudia Sahm recently called on Congress to pass legislation to “check” the Fed, saying “the Fed continues to raise interest rates aggressively, making it costly for Americans defending democracy in Ukraine and threatening recession”.
Powell will hold a press conference at 2:30 p.m. to discuss the Fed’s views on interest rates, the economy and inflation. He is widely expected to attempt to express a firm commitment to bringing inflation back to the Fed’s target while leaving the door open for lower rate hikes in future meetings.