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Fed raises key interest rate for seventh time this year

The Federal Reserve has raised interest rates for the seventh time this year, signaling it is moving more cautiously as the US economy slows.

The Fed’s rate-setting committee road its benchmark rate by 0.5 percentage point on Wednesday, raising its target rate to a range between 4.25% and 4.5%the highest level in 15 years. The federal funds rate affects the cost of borrowing for consumers and companies throughout the economy.

The half percentage point increase marks a reduction from a series of larger interest rate hikes this summer, when the Fed made four straight 0.75% jumps in an effort to stem the most vicious inflation attack in four decades.

In a statement almost identical to the one it issued last month, the Fed said the economy is experiencing “modest” growth and inflation “remains elevated, reflecting pandemic-related supply-demand imbalances, prices higher food and energy prices, and broader prices. pressures”.

The Federal Reserve raises interest rates for the seventh time this year

2:17 p.m.

In particular, policymakers indicated they plan to continue raising rates, but suggested they would proceed more slowly than this year.

“We are seeing the effects on demand in the most interest-sensitive sectors of the economy, such as housing. However, it will take time for all the effects of monetary tightening to materialize, especially on inflation,” said the president of the Fed, Jerome Powell. reporters on Wednesday. He added: “We still have a long way to go.”

don’t relax

Stock markets had rallied earlier this week on expectations that the worst of the Fed’s rate hikes had passed. But stocks fell on Wednesday after Powell emphasized Wednesday that the central bank plans to continue raising rates, albeit more slowly, to counter what he sees as a historically tight labor market.

“We may have to raise rates more to get to where we want to go. That’s why we’re bringing high rates down and expect them to stay high for a while,” he said.

The Fed expects interest rates to rise to between 5.1% and 5.4% next year, close to the level they were in 2006.

“As for the future course of policy, officials now expect a higher maximum funds rate next year to be followed by rate cuts in 2024 and 2025,” Rubeela Farooqi, chief US economist at High Frequency Economics. “The Federal Reserve has now moved into phase two of its rate hike cycle, shifting from a front-loaded approach to a slower pace of rate hikes until rates are in a sufficiently tight stance.”

“Stagflation” ahead?

The Fed’s assessment of the economy has worsened in recent months. He now expects anemic economic growth next year of just 0.5% and predicts unemployment will hit 4.6%, up from its current rate of 3.7%. The Fed also expects inflation to stay high for longer, with its preferred measure of price increases, personal consumption spending, holding at 3.1% next year.

“[T]The combination of lower GDP and higher inflation signals stagflation,” Vital Knowledge’s Adam Crisafulli said in a note.

The consumer price index, a closely watched indicator of inflation, fell to 7.1% in November for a year, led by a decline in the prices of energy, raw materials and used cars, the Labor Department reported Tuesday. That reading was down from a high of 9% in June, buoyed by rising fuel costs.

Still, 7.1% is well above the Fed’s target of 2% inflation, and Powell stressed that the Fed plans to keep raising rates for the foreseeable future, even if it leads to an economic crisis and higher unemployment.

“Reducing inflation is likely to require a sustained period of below-trend growth and some easing of labor market conditions,” he said. “We will stay the course until the job is done.”

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