The Federal Reserve imposed the latest in a series of sharp interest rate hikes on Wednesday in a sign that policymakers aren’t backing down from an aggressive campaign to lower decades-high inflation.
The rate-making Federal Open Market Committee hiked the benchmark interest rate by 0.75%, or 75 basis points, at the end of a two-day meeting. The latest increase moved the Fed’s target range to between 3% and 3.25%.
Fed officials have now hiked the benchmark rate by three-quarters of a percentage point for three consecutive meetings. The three-quarter point hikes are the first of their kind since 1994 – an indication of the Fed’s urgency to bring prices lower.
Prior to the FOMC’s announcement, investors were pricing in an 82% probability of a three-quarter percentage point hike and an 18% probability of a full-point hike. Yields on two-year Treasury notes spiked above 4% on the expectation of another hike.
The Fed was widely expected to implement another sharp rate hike following a dismal August Consumer Price Index that renewed fears about persistent inflation. That’s despite mounting fears among investors that the Fed will be unable to achieve a “soft landing” and will instead tip the economy into a recession with its policy tightening.
Stocks have touched fresh lows in recent days as investors brace for an economic downturn.
The Fed’s benchmark interest has direct and indirect effects that ripple throughout the broader economy. Hikes impact credit card interest rates, savings accounts, auto loans and other forms of borrowing.
They also influence mortgage rates, which have surged above 6% for the first time since 2008 and have triggered a slowdown in the housing market.
Some critics, including billionaire Elon Musk and “Bond King” Jeffrey Gundlach, argue the Fed risks causing destructive deflation by continuing forward with rate hikes despite signs of a slowing economy.
“The Federal Reserve is likely tightening policy straight into the teeth of a recession. Many stock investors are hoping for a dovish pivot, but the stock market’s addiction to Fed easing when stocks decline may be what Jerome Powell is aiming to quash by aggressively hiking rates, in addition to inflation,” said Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence.
Prices rose by a hotter-than-expected 8.3% in August, while core inflation, a measure that excludes volatile food and energy prices, jumped by 6.3%. Inflation is much higher than the 2% range that the Fed and Treasury Department deem acceptable.
The troubling federal data led some analysts to predict the Fed would implement a full-point hike for the first time in several decades.
Even before the August CPI was released, top policymakers, including Fed Chair Jerome Powell, were indicating aggressive rate hikes were in store for the US economy.
During a speech earlier this month, Powell acknowledged the Fed was aware of the risk of “prematurely loosening policy.” He added the central bank was “strongly committed to this project and we will keep at it until the job his done.”
Powell has warned that hikes would continue even if it resulted in “some pain” for US households – including an increase in the national unemployment rate.
In a separate address, Fed Vice Chair Lael Brainard said officials were committed to tightened policy conditions “for as long as it takes to get inflation down.”