The Fed orders another big interest rate boost. Many people are wondering what comes next

 On Wednesday, the Federal Reserve raised interest rates yet again, warning that rates will have to rise even more to keep stubbornly high inflation under control.

Fed rate hike
Fed rate hike

The central bank hiked its key interest rate by 3/4 percentage point. The rate has risen 3.75 percentage points in the last eight months, from near zero in March. This is the most aggressive streak of rate hikes in decades, yet it has done little to reduce inflation so far.

"Interest rates have risen at a dizzying rate, and we're not done yet," said Greg McBride, Bankrate's chief financial analyst. "It will take some time for inflation to fall from these elevated levels, even if we do begin to see some improvement."

According to the Fed's favored yardstick, annual inflation in September was 6.2%, unchanged from the previous month. The more widely known consumer price index shows prices rising at an even faster annual rate of 8.2%.

Fed Chairman Jerome Powell has warned that containing such high inflation will almost certainly necessitate considerably higher interest rates than he and his colleagues expected just two months ago.

Powell told reporters on Wednesday, "What I'm trying to do is make sure our message is clear." "With interest rates, we have some ground to cover before we reach the level that we believe is adequately restrictive."

At the same time, Powell stated that the pace of rate hikes may soon moderate as policymakers assess the impact of increasing borrowing rates on the economy.

"That day is coming," Powell warned, "and it might be as soon as the next meeting or the one after that."

Stocks initially rose on the potential of modest rate hikes in December or January, but quickly fell on the prospect of higher rates in the future. The Dow Jones Industrial Average dropped over 500 points, or 1.55%. The S&P 500 index lost 2.5%.

McBride contends that in order to keep inflation at bay, borrowing prices will have to remain high for a lengthy period of time.

"The 2023 theme is 'higher for longer,'" he said. "It's going to take a while when inflation has been running at 6, 7, 8% and the aim is 2%."

Even if inflation remains unabated, rate hikes are having an impact.

Higher borrowing costs have already had a significant impact on the housing market. Other sectors of the economy are also slowing. Consumers, however, continue to spend money because they are still flush with funds saved early in the pandemic. As a result, the Fed may have to apply the brakes harder and for a longer period of time than it would otherwise.

"We find today that people still have a bit of a savings buffer," said Esther George, head of the Federal Reserve Bank of Kansas City. "That means we might have to stick with it for a while."

George, like her colleagues on the Fed's rate-setting committee, has stated her desire to keep inflation under control. However, she has warned against raising interest rates too quickly during a period of economic uncertainty.

"I've been in the camp of steadier and slower [rate increases] to observe how the implications of a lag will play out," George remarked last month. "My concern is that a series of extremely large rate hikes will drive you to oversteer and miss those turning points."

With polls suggesting that inflation is voters' top concern, the Biden administration and most members of Congress have kept out of the way of the Fed's efforts to control prices. However, a few Democrats have begun to question the Fed's strategy, saying that fast rate hikes may put millions out of work.

"We are gravely worried that your interest rate hikes risk weakening the economy while failing to reduce increasing prices that continue to damage households," wrote Sen. Elizabeth Warren, D-Mass., and colleagues in a letter to Fed Chairman Jerome Powell on Monday.

Mortgage rates have already surpassed 7% for the first time in two decades, slowing the housing market to a halt.

Shawn Woods, a Kansas City homebuilder, said his company went from selling a dozen houses a month before the Fed began hiking rates to less than five.

"I never imagined we'd go from 3% [mortgage rates] to 7% in six months," said Woods, president of Ashlar Homes and the Home Builders Association of Kansas City.

"I believe we're in for a hard six to eight months," Woods predicted. "Typically, housing is what drives us into and out of downturns. And, from a housing standpoint, I believe we've been in a housing recession since March or April."

Despite the consequences of higher interest rates, Powell stated that the Fed has a responsibility to keep inflation under control.

"No one knows whether there will be a recession or not, or how severe that recession will be," Powell added. "Our aim is to bring back pricing stability so that we can have a vibrant labor market that benefits everyone in the long run."


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