On Wednesday, November 2, the U.S. Federal Reserve announced a 75 basis point rate hike to control rising inflation. The rate hike came as expected, as the Fed signaled how it intends to approach monetary policy in the future.
Another rate hike by the Fed
With the Fed’s recent rate hikes, interest rates have climbed to 3.75%-4%, the highest level since January 2008. This is also the most aggressive pace of rate increases since the 1980s. Four years ago, the inflationary situation was the same as today.
In its speech yesterday, the Federal Reserve also hinted that this could be the last 75 basis point rate hike. The U.S. central bank hinted at a change in policy by adding that in determining future hikes, the Fed “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.“
Interestingly, economists have also hinted at a gradual decline in policy. They expect another 50 basis point increase in interest rates in December, followed by smaller increases throughout 2023. A statement from the Federal Open Market Committee (FOMC) reads:
“The Committee anticipates that continued increases in the target range will be appropriate to achieve a monetary policy stance that is sufficiently restrictive to return inflation to 2 percent over time.”
U.S. market developments
Shortly after the FOMC statement, there was a sharp rise on Wall Street for a short time, however, entered a correction later. Shortly after, Fed Chairman Jerome Powell spoke at a press conference, dismissing the idea that they might take a break in the near future. Powell also added that it would take determination and patience to bring inflation down.
“We still have a ways to go, and incoming data since our last meeting suggest that the final level of interest rates will be higher than expected” he added.
Jerome Powell also touched on the idea that there would come a time when the pace of rate hikes would have to slow down. “So that time is coming, and it could come as soon as the next meeting or the one after that. No decision has been made“, he said.
The Fed president also expressed concern about the future. He said it would take longer than expected to stop future rate hikes. This also reduced the chances that the Fed would be able to achieve a soft landing. Responding to the question of whether or not the path to a “soft landing” has narrowed, he said:
“Has it narrowed? Yes. Is it still possible? Yes.”
Jerome Powell also said that the need for higher rates would make it even more difficult. “Policy must be more restrictive, and that narrows the path to a soft landing“, he added.
Some market analysts believe the U.S. could enter a recession within six to nine months, which is mid-2023.