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Fed unleashes another big rate hike but hints at a pullback

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The Federal Reserve on Wednesday raised its benchmark interest rate by three-quarters of a point for the fourth consecutive time, but hinted that it could soon reduce the scale of its rate hikes.

WASHINGTON (AP) — The Federal Reserve raised its benchmark interest rate by three-quarters of a point on Wednesday for a fourth consecutive time, but hinted that it may soon scale back the magnitude of its rate hikes.

The Fed’s decision raised its key short-term rate to a range of 3.75% to 4%, its highest level in 15 years. It was the central bank’s sixth rate hike this year – a streak that has made mortgages and other consumer and business loans increasingly expensive and heightened the risk of recession.

But in a statement, the Fed suggested it may soon shift to a more deliberate pace of rate hikes. He said that over the next few months he would examine the cumulative impact of his sharp rate hikes on the economy. He noted that his rate hikes take time to fully affect growth and inflation.

Those words signaled that Fed policymakers might think borrowing costs are getting high enough to eventually slow the economy and reduce inflation. If so, that would suggest they don’t need to raise rates as quickly as they have.

Yet for now, the persistence of inflated prices and higher borrowing costs is putting pressure on U.S. households and has undermined Democrats’ ability to campaign on the health of the labor market as they try to keep Congressional control. Republican candidates have hammered Democrats on the punitive impact of inflation ahead of the midterm elections that end on Tuesday.

The Fed’s statement on Wednesday was released after its last policy meeting. Many economists expect Chairman Jerome Powell to signal at a news conference that the Fed’s next expected rate hike in December may be as little as half a point rather than three-quarters.

Typically, the Fed raises rates in quarter-point increments. But after miscalculating by playing down inflation last year as likely transitory, Powell led the Fed to raise rates aggressively in an attempt to slow borrowing and spending and ease pressures on investors. price.

Wednesday’s latest rate hike coincided with growing fears that the Fed could tighten credit to the point of derailing the economy. The government reported that the economy grew last quarter and employers are still hiring at a healthy pace. But the housing market has collapsed and consumers are barely increasing their spending.

The average rate on a 30-year fixed mortgage, at just 3.14% a year ago, rose above 7% last week, mortgage buyer Freddie Mac reported. Sales of existing homes have fallen for eight consecutive months.

Blerina Uruci, an economist at T. Rowe Price, suggested that the slump in home sales is “the canary in the coal mine” that demonstrates that Fed rate hikes are weakening a very interest rate-sensitive sector like housing. Uruci noted, however, that the Fed hikes have yet to significantly slow much of the rest of the economy, particularly the labor market or consumer demand.

“As long as these two components remain strong,” she said, Fed policymakers “cannot count on inflation falling” close to their 2% target over the next two years.

Several Fed officials have said recently that they have yet to see significant progress in their fight against rising costs. Inflation rose 8.2% in September from 12 months earlier, just below the highest rate in 40 years.

Still, policymakers may think they can slow the pace of their rate hikes soon, as some early signs suggest inflation could start to ease in 2023. Consumer spending, squeezed by high prices and lending more expensive, hardly increase. Supply chain issues ease, which means fewer shortages of goods and parts. Wage growth is plateauing which, if followed by declines, would reduce inflationary pressures.

Yet the labor market still remains strong, which could make it harder for the Fed to cool the economy and rein in inflation. This week, the government reported that companies posted more job vacancies in September than in August. There are now 1.9 jobs available for every unemployed person, an exceptionally large supply.

Such a high ratio means that employers will likely continue to raise wages to attract and retain workers. These higher labor costs are often passed on to customers in the form of higher prices, further fueling inflation.

Going forward, Goldman Sachs economists expect Fed policymakers to raise their key rate to nearly 5% by March. That’s above what the Fed itself had forecast in its previous set of forecasts in September.

Outside the United States, many other major central banks are also rapidly raising rates in an attempt to calm inflation levels that are even higher than in the United States.

Last week, the European Central Bank announced its second consecutive rate hike, raising rates at the fastest pace in the history of the euro in an attempt to rein in inflation which has hit a record 10.7% last month.

Similarly, the Bank of England is expected to raise rates on Thursday in an attempt to ease consumer prices, which rose at their fastest pace in 40 years at 10.1% in September. Even as they hike rates to fight inflation, Europe and the UK appear to be sliding into recession.

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