Fed raises interest rates another 0.75%, sets stage for more hikes

The news

The Fed voted to raise its benchmark interest rates by 0.75% at its November meeting. Combine it with the similar actions taken at the last three meetings, and this marks the sharpest increase in rates since the 1980s, which was also the last time inflation was as high as it is now.

The Fed is seeking to use its monetary policy tools to bring down inflation, which has been elevated for months. Fed Chair Jerome Powell said at a press conference following the meeting that inflation remains well above the Fed’s goal of 2%, and the latest inflation data for September came back higher than expected. That's the wrong direction.

Why is this happening?

Interest rate hikes are designed to cool the economy, which can help to bring prices down. In this case, the goal is to bring down demand so it comes back into line with supply. After months of hikes, there are some signs that these rate increases are having an impact. Powell said the economy has “slowed significantly” from 2021.

“Real GDP rose at a pace of 2.6 percent last quarter but is unchanged so far this year,” he said. “Growth in consumer spending has slowed from last year’s rapid pace, in part reflecting lower real disposable income and tighter financial conditions.” Housing activity has also cooled.

But the job market still remains “extremely tight,” Powell said. Reinforcing this, the US Labor Department released data showing job openings rose in September. Typically, the Fed's action would cause this number to fall.

On its primary goal, the Fed believes it will take more time for the full effects of the Fed's action to be felt on inflation. So, rate hikes continue.

What’s next?

The Fed’s statements are being closely parsed for signs that rate hikes will start to back off, which would ease the blow they deliver to the economy. Powell made three important statements about the near future of interest rate hikes:

“We still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

Inflation has come down some, but not anywhere near the level that the Fed wants to see. Meanwhile, the labor market remains out of balance. As a result, the ultimate destination of rate hikes will go further than what was predicted at the September meeting. So, more rate hikes are on the way. However, the Fed could reduce the level of rate hikes below 0.75%.

“That time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made. It is likely we’ll have a discussion about this at the next meeting—a discussion.”

This statement addresses the question of whether there will be lower rate hikes at the December meeting. Powell left the door open to it with this statement. He made no firm commitment, but even the suggestion that it is possible is further than he has gone previously.

“It is very premature to be thinking about pausing.”

There was some language in the Fed’s initial statement about rate hikes that it was taking “lags” between the implementation of rate hikes and their effects on the economy into account. This was new language, and might suggest the potential to set the stage for rate hikes to curtail. But in the press conference, Powell said that while there may be a lower percentage attached to rate hikes, the Fed is not yet considering stopping them.

The takeaway: There may be smaller hikes to come, but they aren't stopping soon and will in fact cumulatively go higher.

So, does that mean there be a recession?

As the Fed implements interest rates, a key risk is that it throws the economy into recession. But there is also the prospect for a soft landing, in which rate hikes are executed without much damage. But as rate hikes have been implemented many months in a row, the window for that soft landing has “narrowed,” Powell said.

“We’ve always said it was going to be difficult, but I think to the extent rates have to go higher and stay higher for longer it becomes harder to see the path,” Powell said.

But Powell allowed that the data is unusual. Typically there are more job losses as economic activity slows, but that isn’t happening at this time. Easing of supply issues would typically be paired inflation falling further – which also hasn’t happened.

Powell said that “no one knows” if there is going to be a recession or not, or how bad it is going to be. What’s a surer bet is that the Fed will continue to take action to fight inflation.

As Powell has said repeatedly in recent months, “We will stay the course until the job is done.”