The Federal Reserve announces its eighth interest rate hike within 11 months—boosting rates by a quarter of a percentage point.
- The Federal Reserve increased interest rates for the eighth consecutive time in the past year on Wednesday afternoon, adding a 25 basis-point hike and increasing rates to a range of 4.5% to 4.75%.
- This marks a smaller interest rate hike following multiple months of 75 basis-point hikes, reflecting some improvement in inflation.
- As we previously discussed, the increase will further affect auto financing, loans, and credit cards, tightening monetary policy and pushing the economy toward an artificial recession.
- Since the last hike on December 15, the December consumer price index (CPI) was revealed to be 6.5%, reflecting a continued decline in inflation since the peak of 9.1% in June 2022. Unemployment was only 3.5% in December.
- Fed Chair Jerome Powell anticipates that ongoing increases will be necessary to continue pushing inflation down to its target goal of 2% and that it will hold to its tightened stance for “some time.”
- He also warns that it will take time for the effects of the tightening to be fully realized.
Why It’s Important
The economy continues to prosper despite the efforts of the Fed to purposely reduce overall spending. Unemployment remains low, and optimism is high, despite repeated claims that a recession is due within the next six to 12 months.
The Fed has repeatedly acknowledged an economic danger to its actions, saying that it knows a recession and high unemployment are on the horizon. It prefers these dangers to those of entrenched high inflation, and it has decided to keep monetary policy tight until inflation is under control. However, the current administration’s high spending threatens to undo much of the Fed’s progress.
Many analysts have warned about the extent to which this could backfire. Tesla CEO Elon Musk and ARK Invest CEO Cathie Wood have warned that these actions could cause deflation. Bank of America economist Ethan Harris warns that the Fed will let a severe recession happen. A Wharton Business School Professor, Jeremy Siegel, warns that the move is too aggressive and will harm the working class.
“Over the past year, we’ve taken forceful actions to tighten the stance of monetary policy. We’ve covered alot of ground, but the full effects of our rapid tightening have yet to be felt. Even so, we have more work to do,” says Powell.
“We understand our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals.”