The Federal Reserve pumped up its benchmark interest rate Wednesday by three-quarters of a point for a fourth straight time to fight high inflation but hinted that it could soon reduce the size of its rate hikes.
The Fed’s move raised its key short-term rate to a range of 3.75% to 4%, its highest level in 15 years. It was the central bank’s sixth rate hike this year — a streak that has made mortgages and other consumer and business loans increasingly expensive and heightened the risk of a recession.
But in a statement after its latest policy meeting, the Fed suggested that it might soon shift to a more deliberate pace of rate increases. It said that in coming months it would consider the cumulative impact of its large rate hikes on the economy. It noted that its rate hikes take time to fully affect growth and inflation.
Those words indicated that the Fed’s policymakers may think borrowing costs are getting high enough to possibly slow the economy and reduce inflation. If so, that would suggest that they may not need to raise rates as quickly as they have been doing.
Speaking at a news conference, Chair Jerome Powell avoided sending any clear signal of whether the Fed’s next expected rate hike in December might be only a half-point rather than three-quarters. I have sought to emphasize that the central bank would keep rates in the coming months, possibly to a higher level than it had forecast in September.
“We still have some ways to go,” Powell said. “And incoming data since our last meeting suggests” that the policymakers might have to raise rates higher than they previously thought.
Typically, the Fed raises rates in quarter-point increments. But after having miscalculated in downplaying inflation last year as likely transitory, Powell has led the Fed to raise rates aggressively to try to slow borrowing and spending and ease price pressures.
Wednesday’s rate increase coincides with growing concerns that the Fed may tighten credit so much as to derail the economy. The government has reported that the economy grew last quarter, and employers are still hiring at a solid pace. But the housing market has cratered, and consumers are barely increasing their spending.
The average rate on a 30-year fixed mortgage, just 3.14% a year ago, surpassed 7% last week, mortgage buyer Freddie Mac reported. Sales of existing homes have dropped for eight straight months.
Blerina Uruci, an economist at T. Rowe Price, suggested that falling home sales are “the canary in the coal mine” that demonstrate that the Fed’s rate hikes are weakening a highly interest-rate sensitive sector like housing. Uruci noted, though, that the Fed’s hikes haven’t yet meaningfully slowed much of the rest of the economy, particularly the job market or consumer demand.
“So long as those two components remain strong,” she said, the Fed’s policymakers “cannot count on inflation coming down” close to their 2% target within the next two years.
Several Fed officials have said recently that they have yet to see meaningful progress in their fight against rising costs. Inflation rose 8.2% in September from 12 months earlier, just below the highest rate in 40 years.
Still, the policymakers may feel they can soon slow the pace of their rate hikes because some early signs suggest that inflation could start declining in 2023. Consumer spending, squeezed by high prices and costlier loans, is barely growing. Supply chain snarls are easing, which means fewer shortages of goods and parts. Wage growth is plateauing, which, if followed by declines, would reduce inflationary pressures.
Yet the job market remains consistently strong, which could make it harder for the Fed to cool the economy and curb inflation. This week, the government reported that companies posted more job openings in September than in August. There are now 1.9 available jobs for each unemployed worker, an unusually large supply.
A ratio that high means that employers will likely continue to raise pay to attract and keep workers. Those higher labor costs are often passed on to customers in the form of higher prices, thereby fueling more inflation.
Ultimately, economists at Goldman Sachs expect the Fed’s policymakers to raise their key rate to nearly 5% by March. That is above what the Fed itself had projected in its previous set of forecasts in September.
Like this article? Gain access to all of our great content with a month-to-month subscription. Start your subscription here.