The Federal Reserve raised its main interest rate by a further three-quarters of a percentage point, battling the hottest inflation in decades.
The move by the central bank’s interest rate committee announced on Wednesday after the two-day meeting marks the sixth rate hike this year and the fourth consecutive increase of 0.75 percentage points since June. The massive increase was widely anticipated by Wall Street given that inflation remained high despite the Fed’s aggressive campaign to curb higher prices sharply.
The target Fed rate is currently in the range of 3.75% to 4%.
The rate indicates how much banks pay to borrow money from the Fed, which in turn affectsand takes into account mortgage rates, credit card debt and car loans. The interest rate increases so far have brought the highest level in 20 years.
The Fed suggests that it may slow down the pace of rate hikes
Despite another large increase in the federal fund rate, policymakers have hinted that they are open to slowing the pace of increases as monetary tightening slows the economy down.
“In determining the pace of future increases within the target range, the Committee 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.” statement.
Stock exchanges rose briefly after the announcement, apparently convinced that the end of the interest rate hikes cycle is approaching. But they sank after Fed chairman Jerome Powell told reporters that the bank would continue to raise interest rates.
“It’s very early to think about a pause,” Powell said in a news conference following the Fed’s interest rate announcement.
Powell reiterated his opinion that the labor market was too strong, with historically low unemployment rates and an excess of job vacancies in relation to the number of workers available to fill them. He also suggested that the central bank preferred to raise interest rates too high – potentially putting the economy into recession – rather than risk keeping rates too low to bring inflation down.
But rates are likely to continue to rise
“If we went overboard, we could make a good use of our tools to support the economy,” he said. “Given that if we do not keep inflation under control … we are now in a situation where inflation is already deeply entrenched, and employment costs in particular will potentially be much higher.”
The message, economists say, is that the Fed will continue to raise interest rates to a higher level, though it may do so more slowly.
“More but less is the message the Fed is trying to deliver as more hikes are needed, but possibly at a slower pace,” said Charlie Ripley, senior investment strategist at Allianz Investment Management, in a research note.
“Powell and the committee are trying to balance the optionality of further tightening the policy on the work already done. This does not change the fact that they want to implement a policy plan that is restrictive enough to slow down the economy “
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