The Federal Reserve on Wednesday approved another consecutive rate hike, one of the most recent and serious moves to fight inflation.
The hike
The Federal Reserve approved a fourth consecutive rate hike of three-quarters of a percentage point.
The hike takes the average central bank lending rate to a new range of 3.75% to 4%.
This is the highest interest rate in more than a decade since January 2008.
The Fed’s rate hike is the latest aggressive attempt to rein in the inflation plaguing the US economy.
The decision
Wednesday’s decision comes after the Federal Open Market Committee’s two-day policy meeting.
It also marks the Federal Reserve’s most challenging policy move since the 1980s.
The decision threatens to increase the economic pain for millions of US businesses and households by increasing the cost of borrowing.
It can potentially trigger a recession.
Read also: Stock market movement largely positive in October this year
Soft landing
At a press conference after the meeting, Federal Reserve Chairman Jerome Powell acknowledged that the road to a soft landing was narrowing.
Despite the narrowing lane, he assures people that it is still possible.
Soft landings are a process to cool the economy while 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 reducing inflation.
Furthermore, he asserted that continued inflation would cause more economic suffering compared to a recession.
New language
The Fed’s November statement included a new section added by officials, which came as a surprise.
The Federal Reserve generally repeats the same language on every release.
In its latest statement, the Federal Open Market Committee assumes that further increases in the target range are needed to adopt a monetary policy stance.
Monetary policy is tight in an attempt to bring inflation back to 2%.
Fed watchers might speculate that adding “over time” to their inflation target would have fewer negative consequences.
Further, it could mean the Fed would revert from aggressive rate hikes to lower rate 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 lowering interest rates, recognizing that monetary policy can cool the economy.
Despite the economic data showing strong growth, the cooling economy appears to be working.
Wall Street may also see the new language as a response to the criticism regarding the Fed over-correcting with high rate hikes that could harm the economy.
Read also: Huge rally in the stock market a good sign in October
Markets
Recent data shows that mortgage rates are reaching levels not seen in 20 years and are starting to weigh on the housing market.
New home sales in September were down 10.9% from August.
They are also down 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.
However, despite the changes, the labor market remained tense.
The number of vacancies increased in September to 1.9 vacancies per available employee.
Friday’s job report is expected to show the economy will add 200,000 jobs in October.
While it is lower than last month, the number remains at an all-time high.
Reference:
The Fed makes history with a fourth straight three-quarter-point rate hike
