Federal Reserve lifts rates again, says more will be needed to tame inflation

Are we there yet?

© Graeme Sloan The Marriner S. Eccles Federal Reserve building in Washington, D.C.

No, and it’s not clear when we will be.

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That was Federal Reserve chair Jerome Powell’s disheartening message on Wednesday as he discussed the latest move by the central bank to combat inflation: another jumbo increase in its benchmark lending rate to the steepest level in nearly 15 years.

Powell left no doubt that additional rate hikes would be needed to rein in stubbornly high consumer prices. And he said that Fed officials most likely have to boost rates higher overall than they estimated in September.

But he offered no guidance on how far borrowing costs might rise or when the Fed might take a break to see if higher rates were working.

“It’s very premature to be thinking about pausing,” Powell told reporters in Washington after Fed officials voted to raise the federal funds rate by three-quarters of a percentage point to a range of 3.75 to 4 percent.

“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive,” he said.

It was the fourth consecutive three-quarter-point increase by the central bank, which until this year hadn’t resorted to such a large move since 1994. It’s intended to slow the economy by further driving up the cost of credit cards, mortgages, and business loans.

Like antsy kids in the backseat of a car, Wall Street has been pestering the Fed for an indication of when the inflation fight will end and what it will take to win it.

Powell disappointed them on that score, but he did provide a glimmer of hope. He reiterated previous comments that officials may scale back the size of rate increases — perhaps as soon as December, when they hold their last meeting of the year, or in January.

And he added that Fed policy makers were well aware that it takes time for rate increases to impact the economy and inflation and that they would take that into account as they weighed future moves.

“I still think that they are looking at it as the risk of not hitting inflation hard enough is worse than the risk of recession,” said Rhea Thomas, senior economist at Wilmington Trust.

Stock prices initially rallied on the Fed’s announcement news but fell back during Powell’s sobering news conference.

The Standard & Poor’s 500 index lost 2.5 percent and the tech-heavy Nasdaq dropped 3.4 percent. The yield on the benchmark 10-year Treasury note rose to 4.10 percent from 4.04 percent on Tuesday.

Central bank policy makers are seeking to end the country’s worst inflation outbreak in four decades.

The housing market has cooled dramatically as mortgage rates have almost doubled to more than 7 percent. Business investment has dropped while the growth in consumer spending has slowed.

But the job market remains too tight for the Fed despite a moderation in hiring, and gains in wages haven’t been enough to keep up with inflation.

Payrolls at private employers climbed a higher-than-forecast 239,000 in October, according to a monthly survey by ADP Research Institute and the Stanford Digital Economy Lab. The Labor Department will issue its official jobs report for last month on Friday.

As the Fed throws ice water on the economy, the risk of recession and widespread job losses is mounting, according to economists. But allowing inflation to become a long-term scourge is a bigger threat.

“Unless inflation comes down, workers will not see meaningful increases in their purchasing power,” Lawrence Summers, a Harvard economist and former US Treasury secretary, wrote recently in The Washington Post.

Powell has vowed to get inflation back to the central bank’s longer-term target of 2 percent. Officials’ preferred gauge, the Personal Consumption Expenditures Index, rose by 6.4 percent for the year through August.

Fed officials said in September that they expected the federal funds rate to rise to 4.6 percent this year and into 2023. Most economists, however, say the rate will have to go even higher, and Powell confirmed that on Wednesday.

He also said it was still possible to get inflation back to 2 percent without sending the country into a job-killing recession, though the odds of achieving a “soft landing” have worsened over the course of the year.

“I think no one knows whether there’s going to be a recession or not. And if so, how, how bad that recession would be,” Powell said.

For all of us looking to get past this inflation crisis, Powell was clear: We aren’t there yet.

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