Fed Limits 2022 with 7th Rate Hike. What’s Next?

On Wednesday, the Federal Reserve raised its federal funds rate 50 basis points. This was a reprieve from other higher rate increases in 2022. Although 50 basis point rate increases are not considered a reprieve by most people, it is what seven Fed rate increases in a year can do for a country.

The Federal Reserve raised the federal funds rates by 75 basis points in its efforts to control inflation. This was after two smaller increases. The Fed’s only tool to combat inflation is increasing the fed rate, which ultimately makes credit more costly for consumers and businesses.

Wednesday’s final increase for the year was a mirror of the May increase. Current fed rate is between 4.25% and 4.50 %.

Jerome Powell, Chairman of the Federal Reserve, stated that “our focus isn’t on short-term moves but persistent moves” in a press conference after the rate hike. “We are not yet at a sufficient restrictive policy stance, which is why it is why we state that we expect that continuing hikes would be appropriate.”

All markets fell sharply after the Fed’s announcement.

There hadn’t been any 75-basis point increase in rates since 1994. Nor had there been three increases in a single year before 2022. Rates have been at this level for many years, most recently between 2005 and 2007. Rates were close to 20% in the 1980s and 4% for most of 2001 through 2001.

To slow down economic growth, the Fed uses rate rises to make it more costly for businesses and consumers to borrow money. This discourages consumers and businesses from spending and reduces demand for goods, services, and prices.

It is not clear if the Fed’s interest-rate lever is working to temper inflation. There are signs that things are moving in the Fed’s preferred direction in certain areas.

The inflation rate has slowed. The Bureau of Labor Statistics released the latest Consumer Price Index report Tuesday. It shows that inflation is at 7.1%, which is lower than anticipated. This is down from the June peak of 9.1%. Core CPI, which excludes volatile foods and energy prices, came in below expectations. Although inflation is slowing, it remains well above the Fed’s target of 2%.

The housing market is in decline. The buying boom that occurred during the early pandemic years, when mortgage rates were at their lowest levels, is now over. Data from Freddie Mac shows that borrowing costs reached 20-year highs last November. According to the National Association of Realtors, existing home sales fell for the ninth consecutive month in Oct. However, it is possible that mortgage rates may have reached their peak.

Consumers will pay more to repay their debt. This is because higher interest rates will make any debt that you take on now or in the next year more costly than it was a year ago. This includes variable rate and new loans, such as mortgages, personal, auto, and credit card debt. Consumers who have more debt than they can afford will likely reduce their savings and discourage them from spending.

Although consumer spending has decreased, it is not sufficient. According to the U.S. Bureau of Economic Analysis, consumers have not reduced their spending significantly despite higher prices for goods and services. This is largely due in part to higher wages.

Mike Konczal (director of the Roosevelt Institute’s macroeconomic analyses team) says that everyone is pessimistic about economic conditions, except for those who are at the cashier. “They are still buying a lot, so it seems that we still have some fairly robust growth, even though we are seeing inflation slow down.”

However, high spending is not the only factor. Konczal claims that many people have also overlooked supply problems.

The strength of the employment market continues. Slowing down demand can often lead to people losing their jobs or slowing wage growth. However, neither of these have occurred yet. In fact, the U.S. job market is doing amazing: November saw more jobs added than expected and key indicators such as the labor force participation rate (the quit rate) and job openings have remained stable. Although layoffs have been reported in certain sectors of the tech, media and financial services industries, they are not widespread. The Fed would prefer to see unemployment rise above its current 3.7% rate, and has forecasted that unemployment will reach 4.4% by 2023.

Konczal states that the “biggest thing” about the economy this year has been a strong labor market, with high nominal wage growth and high job market growth.

Wednesday’s Fed statement indicated that it will raise its federal funds rates in 2023. It also reiterated its commitment to an inflation target of 2%.

“We have covered a lot, and the full impact of our rapid tightening so much are still to be felt. Powell, Fed chair, stated that there is still much to be done.

The Fed projects that its target rate for 2023 will be 5.1%. Although it is not clear how fast the Fed will raise rates to this level, Powell stated in a press conference that speed is no longer a priority.

Future interest rate increases will be determined by the overall financial environment and how quickly inflation falls. The Fed can’t control global inflationary factors, such as supply chain bottlenecks or geopolitical turmoil. The Fed’s efforts seem to have failed at home as high wages and low unemployment are a major problem.

Konczal states, “I believe there’s room to inflation to come down without unemployment rising very much or at all.” “Will it fall enough to make the Fed happy? That’s a big open question. And how patience will the Fed have if it does, but not all of the time?”

Economists are unsure what lies ahead for the U.S. in 2023. However, 2021’s forecasts about 2022 were a reminder that economic forecasting can be flawed.

Konczal says that Wall Street, banks and professional forecasters all missed high inflation. “I think this year people expected it would be narrower in terms of how it was impacting and come home a little faster.”