On Wednesday, the Federal Reserve announced yet another significant increase in interest rates and issued a warning that further increases would be necessary to manage the inflation that has been stubbornly high.
KeyPoints
- Jerome Powell, the chairman of the Federal Reserve, issued a warning that managing such high inflation will probably necessitate much higher interest rates than he and his colleagues had anticipated just two months prior.
- Consumers, meanwhile, who still have plenty of money they saved up before the outbreak, continue to spend.
- Esther George, president of the Federal Reserve Bank of Kansas City, stated, “We see today that there is a bit of a savings buffer still sitting for consumers, that may allow them to continue to spend in a way that maintains demand healthy.”
- However, a few Democrats have started to criticize the central bank’s strategy, stating that aggressive rate increases could result in millions of people losing their jobs.
- “Since mortgage rates have reached 7% for the first time in 20 years, the housing market has already slowed to a crawl.
Detailed Reports
The benchmark interest rate was increased by the central bank by 0.75%. In March, the rate was almost zero; since then, it has increased 3.75 percentage points. Although that is the most aggressive series of rate increases in decades, inflation hasn’t been significantly reduced as of yet.
Greg McBride, chief financial analyst at Bankrate, stated that interest rates have climbed rapidly and that they are still rising. Even once we start to see some improvement, it will take some time for inflation to decline from these high levels.
According to the chosen yardstick of the Fed, annual inflation in September was 6.2%, remaining constant from the previous month. Even more quickly, at an annual rate of 8.2%, prices are rising according to the more widely recognized consumer price index.
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Jerome Powell, the chairman of the Federal Reserve, issued a warning that managing such high inflation will probably necessitate much higher interest rates than he and his colleagues had anticipated just two months prior.
Powell told reporters on Wednesday, “What I’m trying to do is make sure our message is clear.” Before we reach the level of interest rates that we believe to be adequately restrictive, we still have some territory to cover.
Powell also noted that as policymakers assess the impact that increased borrowing costs are having on the economy, the tempo of rate hikes may shortly slow.
The next meeting or the one after that may mark the beginning of that time, according to Powell.
Stocks first rose when there was a chance of lower rate increases in December or January, but they quickly fell as it became clear that rates would eventually need to rise. More than 500 points, or 1.55%, were lost by the Dow Jones Industrial Average. The larger S&P 500 index decreased by 2.5%.
According to McBride, borrowing prices will probably need to stay high for a while in order to control inflation.
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“Higher for longer” will be the catchphrase in 2023, he declared. “It’s going to take a while when inflation has been running at 6, 7, or 8% and the aim is 2%.”
Even though inflation is unchecked, rate increases are having an impact.
The home market has already been severely impacted by higher borrowing costs. Additionally, some sectors of the economy are starting to slacken. Consumers, meanwhile, who still have plenty of money they saved up before the outbreak, continue to spend. The Fed may have to apply the brakes more forcefully and for a longer period of time as a result.
Esther George, president of the Federal Reserve Bank of Kansas City, stated, “We see today that there is a bit of a savings buffer still sitting for consumers, that may allow them to continue to spend in a way that maintains demand healthy.” That signals we might need to continue working on this for a while.
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George has made it clear that she is committed to reducing inflation, just like her fellow members of the Fed’s rate-setting committee. However, she has also issued a warning against hiking rates too quickly at a period of economic uncertainty.
George declared last month, “I have been in the camp of steadier and slower [rate hikes], to begin to understand how those consequences from a lag will manifest. “My worry is that a series of very large rate hikes can make you oversteer and prevent you from seeing those turning points,” the speaker said.
The Biden administration and the majority of Congress members have avoided interfering with the Fed’s efforts to control prices, despite polls suggesting that voters’ main concern is inflation. However, a few Democrats have started to criticize the central bank’s strategy, stating that aggressive rate increases could result in millions of people losing their jobs.
Sen. Elizabeth Warren, D-Massachusetts, and colleagues sent a letter to Fed chairman Jerome Powell on Monday stating their grave concern that interest rate increases “risk slowing the economy to a crawl while failing to halt increasing prices that continue to damage households.”
Since mortgage rates have reached 7% for the first time in 20 years, the housing market has already slowed to a crawl.
Shawn Woods, a home builder in Kansas City, claimed that his business has reduced the number of homes it sells each month from 12 to under 5.
According to Woods, president of Ashlar Homes and the Home Builders Association of Kansas City, “I never in my wildest thoughts would have guessed we’d go from 3% [mortgage rates] to 7% within six months.”
Woods predicted that the next six to eight months will be difficult. “Typically, housing is the catalyst for both the onset and resolution of economic downturns. And from the perspective of housing, I believe that we have likely been in a housing recession since March or April.”
Despite the negative effects of increased interest rates, Powell stated that the central bank has a duty to contain inflation.
Nobody can predict whether or not there would be a recession or how severe it will be, according to Powell. “Our responsibility is to bring back price stability so that, over time, we can have a healthy labor market that benefits all.”
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The Fed raises rates again, warned that interest rates will need to rise