Without any surprises, the Federal Reserve Bank reinforced its hawkish interest rate hike policy with a fourth consecutive 75 bps increase, lifting the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008. If Fed Chair Jerome Powell is to be believed, it is not the last rise we will see. “It is very premature to be thinking about pausing. We still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” he said during the press conference following the Federal Reserve’s announcement.
However, Powell is also paving the way for smaller increases than the ones we have seen so far for their upcoming meeting in December, so the Fed may reach its goal of a 2% inflation rate without taking a heavier toll on the American economy than is necessary. In the accompanying statement, the Federal Open Market Committee indicated that “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.”
Although the interest hike policy initiated by the Fed in March is starting to show its effects on the economy, such as a deceleration in housing prices, there is a significant lag between the moment an interest rate increase is initiated, its effect on the economy, and the collection and publication of data. Therefore, deciding when and how much to increase rates is a delicate balancing act.
No End in Sight
Jerome Powell remains cautious to avoid giving a timeline regarding further rate increases. “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.
In addition, the Fed must contend with external factors over which it has little control, but which may significantly affect the state of inflation and overall economic health in the United States; the consequences of the ongoing war between Russia and Ukraine on the energy market, the state of inflation in Europe, and the supply chain issues due to the COVID-19 pandemic in China.
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