Fed Continues Ratcheting Rates With 75-Basis-Point Hike

Borrowers will pay more due to the significant increase, which is being implemented for the third time in a row to suppress inflation further. 

The United States Federal Reserve continued to exert pressure on inflation and the economy, setting the stage for more aggressive rate hikes with a third super-sized increase of 75 basis points to its benchmark interest rate. The widely anticipated move, announced on Wednesday afternoon, brings the crucial fed funds rate to a range of 3 to 3.25% and signals the central bank’s determination to raise interest rates until inflation subsides.

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

Note: The federal funds rate greatly affects interest rates across the economy, including credit cards and car loans, and it is not the rate you get on those loans. Banks often charge a set amount above their so-called prime rate, usually. And the prime rate moves in tandem with the fed funds rate, but it’s more commonly around 3 percent higher.

The Fed had kept interest rates close to zero during the pandemic COVID-19 to stimulate economic activity and to keep financial markets running smoothly during the economic havoc the pandemic COVID-19 caused with the arrival of both. And it’s now trying to do the opposite by discouraging borrowing and lending in the hope that lower demand for goods and services will calm prices. Inflation rose to 9.1% this summer, the highest in four decades, and recent data shows it is only slowing slightly.

The Fed’s projections for the United States economy, also released on Wednesday, turned more pessimistic in light of developments following its last round of forecasts in June. Also, Fed officials now forecast raising the interest rate to 4.6% in 2023, up from 3.8% in June. They also observed that the unemployment rate continued to be as high as 4.4%, a significant increase from June’s estimate of 3.9% and from its current low of 3.6%. And FOMC members also forecasted core PCE inflation, a key price measure that excludes food and energy, to fall 3.1% annually next year instead of the 2.7% previously forecast (it’s currently running at 4.6%).

The Fed’s rate hike campaign is having far-reaching effects on the personal finances of consumers. And the interest rates people pay on common types of loans, including credit cards and car loans, are directly tied to the fed funds rate. And it’s also, indirectly, skyrocketing mortgage rates, making it more difficult to buy and sell a home.

Powell acknowledges that a hike in rates is likely to discourage businesses from hiring workers, which would hurt a great job market for job-seekers at present. Too many economists believe the Fed’s rate hike will drive hiring and economic growth so high that the economy could risk a recession early next year.

“The rising cost of borrowing is affecting businesses that are already being constantly squeezed by inflation and rising labor costs,” George Ratio, manager of economic research at Realtor.com, said in a commentary. “All the many companies outside are moving to reduce or reduce your expenses. While some of the layoffs have been limited to certain sectors, we may see a growing wave of companies cutting payrolls this coming winter.

But Powell said the pain was necessary to avoid a worse outcome in the long run. High-interest rates, slow growth, and a soft labor market are all painful for the masses that we serve. However, they masquerade as failing to restore price stability and then returning to do so on the road are not painful, “he said.

Powell said the housing market in particular needs “tough reform” to bring it back into balance. Prices have recently begun to plummet from the hot pandemic-era housing market, but some economists say homes are still overvalued.