The Fed has hiked interest rates again, and this time by a full percentage point. This is the second such hike in as many months, and it takes the target rate to 2.5%.
The move comes as a surprise to many, as it was widely expected that the Fed would take a more cautious approach given the uncertain economic outlook. However, with inflation still running below the 2% target, the Fed has decided to act.
What does this mean for the economy?
In the short run, higher interest rates will put upward pressure on borrowing costs and could weigh on economic growth. However, the Fed is betting that higher rates will eventually lead to higher inflation, which would be good news for the economy overall.
Only time will tell if this gamble pays off, but in the meantime, businesses and consumers should brace for higher borrowing costs.
But it’s not all bad news. Higher interest rates also mean that savers will finally start to earn some decent returns on their money. And with inflation still relatively low, there’s no need to worry about your savings losing value.
So what’s next for the economy? We’ll have to wait and see how higher interest rates impact growth. But one thing is for sure: the Fed is keeping a close eye on the situation and will act if necessary to keep the economy on track.
Wednesday’s rate hike from the Fed gave another major boost to interest rates and warned that rates would have to rise even more to keep stubbornly high inflation under check.
The benchmark interest rate at the central bank was raised by 3/4 percent. In the past eight months, the rate has increased by 3.75 percentage points, from close to zero in March. This is the most aggressive series of rate increases in decades. However, it has not done much to curb inflation.
The September annual inflation rate was 6.2% according the Fed’s preferred yardstick, unchanged from the previous month. The more well-known consumer price index shows prices increasing even faster at an annual rate of 8.2%.
Fed Chairman Jerome Powell warned that to control severe inflation, it will likely take higher interest rates than he or his colleagues predicted two months ago.
Powell stated Wednesday that he was trying to make sure the message was clear. “We have some ground left to cover with interest rate before we reach that level we believe is sufficient restrictive,” Powell said to reporters Wednesday.
Powell also stated that the pace of rate rises may slow down as policymakers assess the impact higher borrowing costs have on the economy. Powell stated, “That time is coming and it may arrive as soon as the following meeting or one after that.”
Initial rallies were triggered by the possibility of lower rates in December or January. However, stocks soon began to fall at the realization that rates would eventually have to rise. The Dow Jones Industrial Average lost more than 500 points or 1.55%. The S&P 500 index as a whole fell 2.5%.
Even though inflation is not under control, rate hikes have an impact.
The housing market has already been hit hard by rising borrowing costs. Other parts of the economy are also beginning to slow. Consumers, who still have plenty of cash from the pandemic, are continuing to spend. The Fed might have to apply the brakes more forcefully and for longer than usual.
Polls showing that inflation is a major concern for voters have led the Biden administration to stay out of the Fed’s way while it attempts to control prices. However, a few Democrats are challenging the central bank’s strategy and warning that rate hikes could lead to millions of people losing their jobs.
How will the Fed rate increase affect the housing market?
“We are deeply worried that your interest rate increases risk slowing down the economy while failing to slow growing prices that continue to damage families,” Sen. Elizabeth Warren (D-Mass.) and her colleagues wrote in Monday a letter to Fed Chairman Jerome Powell.
The US housing market slowdown is already evident as mortgage rates rise to 7%, the highest level in 20 years.
Home sales have been falling since last spring as buyers are priced out of the market and discouraged by the difficulty of finding a property to purchase.
The rise in rates is expected to further slow the housing market and make it more difficult for first-time buyers to enter the market. Many are asking if now is the right time to buy a house.
Investors are also fleeing the stock market as higher interest rates make bonds more attractive. The 10-year Treasury yield reached its highest level in four years on Wednesday, spurring a sell-off in stocks.
Higher rates could also lead to job losses as businesses find it more costly to borrow money for expansion. And if inflation does start to heat up, rate hikes could put a damper on consumer spending, which
Powell stated that no one knows whether there will be a recession and, if so, how severe it would be. Our job is to stabilize prices so that we have a strong labor force that benefits everyone, over time.