Fed raises interest rate by half a percentage point, its highest level in 15 years

The Federal Reserve has raised the interest rate to its highest level in 15 years. On Wednesday, the state bank announced it was raising rates by half a percentage point – between 4.25 percent and 4.5 percent. Following the increase, the Federal Open Market Committee (FOMC) said it would keep rates higher until next year.

According to bank officials, there would likely be no reduction until 2024. In addition, the FOMC has stated that its expected terminal rate or end point of increase is 5.1 percent. This represents a target range of 5% to 5.25%.

By raising rates to their highest level in 15 years, the Fed is indirectly indicating that the challenge of curbing inflation is not over. This perception contradicts the previously widely acknowledged promising signs of a possible decline in inflation.

This latest increase ended a run of four consecutive 75-basis-point rate hikes, the most aggressive policy in about 40 years. At a press conference, Fed Chairman Jerome Powell stressed the importance of continuing to fight inflation. According to Powell, these inflation control measures help prevent higher price expectations from taking root. The Fed president noted:

“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But much more evidence is needed to be certain that inflation is on a sustained downward path.”

The FOMC continues to monitor the situation closely.

Stocks fall as the Fed raises interest rates to their highest level in 15 years.

Investors reacted poorly to suggestions that rates could stay higher for longer, sending stocks lower. As a result, the S&P 500 halted its two-day winning streak, losing 0.61% to 3,995.32. In addition, the Nasdaq Composite lost 0.76% to 11,170.89, while the Dow Jones Industrial Averagedeclined 142.29 points, or 0.42%, to 33,966.35. Jim Caron of Morgan Stanley Investment Management spoke on the Fed’s latest fiscal decision and why it is denting investor confidence. As Caron put it:

“The big problem that makes it hawkish is that the Fed’s forecast puts the terminal rate at 5.1% for 2023, up from 4.6% at the September meeting. There’s no hat tip to the notion that [le rythme de] inflation is starting to come down. They completely ignored it.”

It remains to be seen how the Fed’s latest rate hike, at its highest level since December 2007, will affect a weakened economy in 2023. In addition, analysts believe the Fed will pause its monetary tightening policy when the funds rate reaches the median level of 5.1% next year. Consensus calls for rate cuts of a full percentage point in 2024, which will ultimately result in a funds rate of 4.1 percent. In addition, 2025 could see further one percentage point reductions to a rate of 3.1% before the benchmark reaches a long-term neutral level of 2.5%.

In addition to its current inflation control measures, the Federal Reserve has also used quantitative tightening. This involves allowing the proceeds of maturing bonds to flow off its balance sheet each month rather than reinvesting them.