The Federal Reserve’s expected move to increase the Fed funds rate by 75 basis points forecasts economic stagnation ahead.
Key Details
- After several weeks of uncertainty, the Federal Reserve officially hiked interest rates another 75 basis points, for the third time in 2022.
- The Fed is attempting to slow the economy down and stabilize the inflation rate, which rose to 8.3% in August.
- It wants to reduce the rate to 2% and may continue hiking rates for the duration of the year.
- The Fed has already suggested two more rate hikes are possible by the end of the year.
- “Projections from the central bank’s meeting indicated participants expect to increase rates by at least 1.25 percentage points in the two remaining meetings this year,” CNBC reports.
- Stock markets took a hit following the announcement. S&P 500 Index, the Dow Jones Industrial Average, and the Nasdaq Composite Index all dropped about 1.7%.
Why it’s news
As we previously reported, the Fed has been debating the repercussions of a third hike since before the Jackson Hole speech by Fed Chair Jerome Powell last month. Powell suggested that the Fed will need to maintain a restrictive policy stance for an extended period of time in order to reduce inflation.
“Rate increases appear to have slowed key sectors of the economy, sending mortgage rates higher and slowing the construction of new homes, for instance,” says ABC News.
He acknowledged that the burdens that will come with it will fall “most heavily on those least able to bear it.” The decision is likely to stifle economic growth and soften labor market conditions at the cost of households and businesses.
The hike represents the Fed’s highest lending rate since its response to the 2008 financial crisis and suggests that Powell is digging in for at least two to three years of anti-inflation measures.
“Officials expect inflation next year to come down to 2.8% to 3.1% on a core basis. It’s not until 2024 that officials expect inflation gets back down closer to 2%, the Fed’s target. Officials projected 2.3% in 2024, followed by 2% in 2025,” says Yahoo Finance.
“The Fed’s updated Summary of Economic Projections, released Wednesday, reflects that pain: The quarterly report showed a less optimistic outlook for economic growth and the labor market, with the median unemployment rate inching up to 4.4% in 2023, higher than the 3.9% Fed officials projected in June and substantially higher than the current rate of 3.7%,” reports CNN Business
Notable quote
“Our expectation has been we would begin to see inflation come down, largely because of supply-side healing. We haven’t. We have seen some supply side healing but inflation has not really come down. I think that shelter inflation is going to remain high for some time. We’re looking for it to come down, but it’s not exactly clear when that will happen. It may take some time. Hope for the best, plan for the worst,” says Fed Chair Jerome Powell.