Federal Reserve Hikes Interest Rates Again — What to Expect

The Federal Reserve surged ahead with a fourth straight significant interest rate hike — an increase of 0.75 of a percentage point — trying to tamp down soaring inflation.

At a news conference, Jerome Powell, Federal Reserve Chair, said the Fed might slow down the pace of interest rate hikes as soon as in December. “That time is coming, and it may come as soon as the next meeting or the one after that,” said Powell. 

However, Powell added the Fed is not getting closer to pausing its interest rate hike campaign and will need to raise rates quite a bit more to reach a level “sufficiently restrictive” enough to push inflation down to the Fed’s target of 2%. 

Powell said the concern is that inflation may become “entrenched” in the expectations of businesses and consumers, and the Federal Reserve must make decisive moves to head off that dynamic. “It’s very premature to be thinking about pausing,” said Powell. “We have a ways to go.” Citing recent soaring inflation figures, Powell added that rates could rise above the 4.5% to 4.75% range that officials at the Fed previously anticipated.

Inflation numbers “do suggest to me that we may move to a higher level than we thought at the September meeting,” said Powell. “There’s no sense that inflation is coming down.”

After the two-day meeting, Fed officials said that when weighing possible future rate hikes, they will consider the typical lag between the Federal Reserve’s actions, their effects on the economy, and the substantial increases they have already approved. 

Wall Street observers interpret the Fed’s statements as a sign it may reduce the pace of hikes. However, Powell downplayed that view.

Latest fed rate hike: How will credit cards, auto loans, and mortgages be affected?

As widely predicted, the Fed raised its critical short-term rate by three-quarters of a percentage point to between 3.75% and 4%, considered a “restrictive” level intended to combat inflation by continuing to slow an unsteady economy. 

Since March of this year, the Fed has raised its federal fund’s rate, what banks charge each other for any overnight loans, from close to zero, in what equals its most aggressive initiative since 1980.

According to economists, the Fed’s strategy, combined with inflation, is expected to tip the economy into a recession by 2023. 

The recent Fed move is expected to send ripples across the economy, driving up rates for home equity lines of credit, credit cards, and other loans. Thirty-year mortgage rates have already jumped above 7% from a low of 3.22% earlier in the year. Simultaneously, households, especially those with seniors, are finally seeing higher yields from bank savings accounts after years of low returns. 

Since the last Fed meeting six weeks ago, there have been other hints that inflation could soon come down. The monthly U.S. job growth has fallen from July’s 537,000 to 263,000 in September. Private-sector salaries and wages grew 5.2% from July through September, which is still historically high but lower than the 5.7% seen in the previous quarter.

The consumer price index, the most widely-followed inflation gauge, showed that September overall prices were up 8.2% from the previous year but slightly lower than the four-decade high in June of 9%.

Job openings soared from 10.3 million to 10.7 million in September after pulling back from record-breaking highs in the spring and summer. The situation could put pressure on wages as employers must compete for a worker pool that is still limited compared to pre-pandemic levels.

“We aren’t going to declare victory until we really see convincing evidence, compelling evidence that inflation is coming down,” said Powell to reporters. 

Without significant Fed rate increases, economic experts expect inflation to slow as commodity prices fall, supply-chain bottlenecks ease, and a strong dollar lowers import costs. Retailers offered discounts to try and unload swollen inventories. 

Powell has often said the Federal Reserve must increase rates to tamp down expectations consumers have over inflation.