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The Federal Reserve approved another consecutive rate hike on Wednesday, one of the latest and heaviest decisions to fight inflation.
The hike
The Federal Reserve approved a fourth consecutive three-quarter percentage point rate hike.
The increase brings the central bank’s average borrowing rate to a new range from 3.75% to 4%.
It has been the highest interest rate in over a decade since January 2008.
The Fed’s hike is the latest aggressive effort to curb the inflation plaguing the US economy.
The decision
Wednesday’s decision follows the Federal Open Market Committee’s two-day policy meeting.
It also marks the Federal Reserve’s most challenging policy move in more than four decades.
The decision threatens to increase the economic pain for millions of US businesses and households, further increasing the cost of borrowing.
It can also trigger a recession.
Read also: Home building retreated last month as mortgage rates surged
Soft landing
At a press conference after the meeting, Federal Reserve Chairman Jerome Powell acknowledged that the road to a soft landing is narrowing.
However, he assures people that it is still possible.
Soft landings are a process of cooling the economy and avoiding a recession.
“The inflation picture has become more and more challenging over the course of this year,” said Powell.
“That means we have to have policy be more restrictive, and that narrows the path to a soft landing.”
Jerome Powell reiterated his commitment to lower inflation.
Furthermore, he asserted that persistent inflation would cause more economic suffering than a recession.
New language
The Fed’s November statement included a new section added by officials, which was a surprise.
The Federal Reserve generally repeats the same language in each release.
In the latest statement, the Federal Open Market Committee assumes that continued increases in the target range are needed to adopt a monetary policy stance.
Monetary policy tightened to eventually bring inflation down to 2%.
Fed watchers might assume that adding “over time” to their inflation rate target implies less negative impact.
Furthermore, it could mean the Fed will scale back from aggressive rate hikes to smaller hikes over the longer term.
The statement further stated:
“In determining the pace of future increases in 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.”
Cooling economy
The new language also paves the way for easing interest rates, recognizing that monetary policy can already cool the economy.
Despite economic data showing strong growth, the cooling economy appears to be effective.
Wall Street may also see the new language as a response to mounting criticism that the Fed is over-correcting with high rate hikes that could harm the economy.
Read also: Federal Reserve raises interest for the fifth time in 2022
Markets
Recent data shows that mortgage rates are reaching levels not seen in 20 years and are beginning to weigh on the housing market.
In September, new home sales fell 10.9% from August.
They also fell by 17.6% compared to 2021.
However, inflationary pressures are also easing.
Wages and salaries increased by 1.2% in the third quarter after 1.6% in the second quarter.
Despite the changes, the labor market remained tense.
The number of vacancies increased in September to 1.9 vacancies for every available employee.
Friday’s employment report is expected to show the economy will add 200,000 jobs in October.
Although lower than last month, the number is still at an all-time high.
Reference:
The Fed makes history with a fourth straight three-quarter-point rate hike
