Fed Continues Ratcheting Rates With 75-Basis-Point Hike

The Federal Reserve continued to put the squeeze on inflation—and the economy—with a third super-sized 75 basis-point increase to its benchmark interest rate and setting the stage for more aggressive rate hikes to come. 

The widely-anticipated move, announced Wednesday afternoon, brings the crucial fed funds rate to a range of 3 to 3.25% and signals the central bank’s determination to keep raising interest rates until inflation is vanquished. 

My colleagues and I are strongly committed to bringing inflation back down to our 2% goal. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses,” Fed Chair Jerome Powell said in a press conference. “We anticipate that ongoing increases will be appropriate.”

The Fed had held interest rates near zero during the pandemic to stimulate economic activity and keep financial markets running smoothly during the economic havoc caused COVID-19’s arrival. It’s now trying to do the opposite: discourage borrowing and lending in hopes that less demand for goods and services will cause prices to cool off. Inflation jumped to 9.1%, its highest in over four decades this summer, and recent data shows it’s only slowed down slightly.

The Fed’s projections for the economy, also released Wednesday, grew more pessimistic in light of the developments since its last round of forecasts in June. Fed officials now anticipate raising the interest rate as high as 4.6% in 2023, versus 3.8% in June. They also saw the unemployment rate getting as high as 4.4%, up from the June projection of 3.9% and a significant increase from its current low level of 3.6%. FOMC members also projected core PCE inflation, an important price measure that excludes food and energy, dropping to 3.1% annually next year instead of the 2.7% previously forecast (It’s currently running at 4.6%.)

The Fed’s campaign of rate hikes is having a far-reaching impact on consumers’ personal finances. Interest rates people pay on common kinds of debt, including credit cards and car loans, are directly tied to the fed funds rate. It’s also, indirectly, caused mortgage rates to skyrocket, which has made it much more difficult to buy and sell a house. 

Powell has acknowledged that the rate hikes are likely to discourage businesses from hiring workers, which will damage what is currently a great job market for job hunters. Many economists believe the Fed’s rate hikes will quash hiring and economic growth so much that the economy risks falling into a recession sometime early next year. 

“Rising borrowing costs are impacting businesses that are already being squeezed by inflation and rising labor costs,” said George Ratiu, manager of economic research at Realtor.com, in a commentary.  “Many companies are moving to contain or cut back on expenses. While layoffs have been limited to certain sectors to date, we may see a growing wave of companies cutting payrolls during this winter.”

But Powell said the pain was necessary to avoid an even worse outcome in the long run.

“Higher interest rates, slower growth and a softening labor market are all painful for the public that we serve. But, they're not as painful as failing to restore price stability, and then having to come back and do it down the road,” he said.

Powell said the housing market in particular needed a “difficult correction” to bring it back into balance. Prices have recently begun to decrease from the hot pandemic-era housing market, but some economists say homes are still overvalued.

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