The Fed approves a 0.75-point price hike to take charges to their highest ranges since 2008, hinting at a coverage shift imminent

The Federal Reserve approved a fourth straight three-quarter-point rate hike on Wednesday, signaling a possible shift in its approach to monetary policy to bring inflation down.

In a well-heralded move that markets had been anticipating for weeks, the central bank hiked its short-term interest rate by 0.75 percentage point to a target range of 3.75% to 4%, the highest level since January 2008.

The movement continued the most aggressive monetary tightening since the early 1980s, when inflation was last this high.

Alongside expectations of the rate hike, markets had also been searching for words to suggest that this could be the latest move of 0.75 points or 75 basis points.

The new statement hinted at this change in policy by saying the Fed 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.”

Economists are hoping this is the much-discussed “step down” in policy that could bring a half-point rate hike at the December meeting and then some smaller hikes in 2023.

This week’s statement also expanded on previous language, simply stating that “ongoing increases in target range will be appropriate.”

The new wording read: “The Committee believes that continuous increases in the target range will be appropriate to achieve monetary policy restrictive enough to bring inflation back to 2 per cent over time.”

Markets will look for more clarity at Chair Jerome Powell’s 2:30 p.m. press conference on whether the Fed believes it can implement less restrictive policy that would involve a less dramatic level of rate hikes to meet its inflation targets .

Along with the change in statement, the FOMC re-rated growth in spending and output as “moderate” and noted that “job gains have been robust in recent months” while inflation is “elevated”. The statement also reiterated language that the committee is “very vigilant about inflation risks.”

The rate hike comes as recent inflation readings show prices are staying near 40-year highs. A historically tight job market, with almost two open positions for every unemployed person, is driving wages higher, a trend the Fed is trying to counter by tightening the money supply.

There are growing concerns that the Fed’s efforts to lower the cost of living will also plunge the economy into recession. Powell said he still sees a path to a “soft landing” that doesn’t involve a sharp contraction, but the US economy has shown virtually no growth this year, although the full impact of rate hikes is yet to materialize have to.

At the same time, the Fed’s preferred measure of inflation showed that the cost of living rose 6.2% year-on-year in September — even up 5.1% excluding food and energy costs. GDP contracted in both the first and second quarters, meeting the usual definition of a recession, although it picked up again in the third quarter to 2.6%, mainly due to an unusual pick-up in exports. At the same time, home prices have plummeted as 30-year mortgage rates have risen over 7% in the past few days.

On Wall Street, markets rallied on anticipation that the Fed may soon begin easing rates as concerns mount about the longer-term impact of higher rates.

The Dow Jones Industrial Average is up more than 13% over the past month, partly on the back of an earnings season that wasn’t as bad as feared, but also amid growing hopes of a Fed policy recalibration. Treasury yields have also come off their highest level since the beginning of the financial crisis, but remain high. The benchmark 10-year bond was last at around 4.04%.

There’s little to no expectation that rate hikes will stop anytime soon, so the expectation is just slower. Futures traders are pricing in a near-miss coin flip chance of a half-point hike in December versus another three-quarter-point move.

Current market prices also suggest that the Fed Funds rate will peak near 5% before rate hikes stop.

The Fed Funds Rate sets the amount that banks charge each other for overnight loans, but spills over into several other consumer debt instruments such as adjustable-rate mortgages, car loans and credit cards.

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