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The US Federal Reserve increased the borrowing rates by 75 basis points again on Wednesday. The interest rate increase marked the fourth consecutive similar raise. Meanwhile, the Fed chairman hinted at a possible lower interest raise pace in the future. He echoed the need for central banks’ commitment to raising borrowing costs to slow down the soaring rates of inflation.
In any case, the chairman mentioned that interest rate increases in the future would consider financial & economic developments, lag effects of the monetary policy on economic activity, and the cumulative tightening of monetary policies. Most stocks went green after this announcement and fell again after the chairman told reporters that the Federal Reserve has no better alternatives to help fight against inflation.
Powell said it is premature to talk or consider curbing the ongoing rate hikes. The federal reserve seeks to sustain the rate hikes until it attains a sufficiently restrictive territory. Thus, it may opt to update rate hikes based on the incoming data since it cannot predict what the sufficiently restrictive territory might involve. The borrowing costs increase brought the federal funds rate & central banks’ policy rates to a new range of 3.75 percent to 4 percent. The shift marked the highest level in 14 years.
Hence, Powell mentioned that the borrowing rates could rise beyond the 4.6% mark that they estimated previously. The four consecutive 75 basis point rate increase is unprecedented since the late 1980s when the Fed explicitly began directing the federal funds to implement monetary policies. What’s more, the announcement on Wednesday stimulated the borrowing rates to a level it has not recorded since late 2007.
Generally, the Fed seeks to attain a policy rate that is sufficiently restrictive and maintain it for a while until it compiles compelling evidence that inflation would likely drop back to 2%. On the other hand, analysts are concerned that these rate hikes could make it challenging to attain a soft landing and avoid a painful recession. Powell said that recession predictions have turned out to be more challenging throughout the whole year.
These recession uncertainties have lured the Fed to initiate more restrictive policies that somewhat narrow the chances of experiencing a soft landing. The labor market is constantly “out of balance, " and economic growth is slowing. Nonetheless, the Federal Reserve has recorded a more robust job market than before the rate hikes.
Above all, the Fed now points to a lower unemployment rate and substantial job gains following the measures they adopted. Analysts predicted that the job report on Friday would show around 200,000 new nonfarm payrolls in October. However, the report would be 63,000 jobs less than September and 220,000 fewer jobs than the monthly average in 2022.