In an effort to reduce inflation, the Federal Reserve increased its interest rates by a large amount. This is the most drastic measure in a campaign that has increased the likelihood of recession.
The Federal Open Market Committee met in Washington for two days and announced that the central bank would increase its target interest rate by three-quarters percent, or 75 basis point. This is the fourth consecutive rate increase on this scale. It’s a historic aggressive move that demonstrates the Fed’s determination to lower inflation.
Jerome Powell, Fed Chairman, stated that the Fed is moving its policy stance to a level that will allow inflation to be returned to 2%. This was during a Wednesday press conference. “In addition, the Fed is continuing to reduce the size of its balance sheet. It will be necessary to maintain a restricted policy stance in order to restore price stability.
Fed officials said in a statement that future hikes might not be as significant as the previous four. The central bank also reiterated its commitment to bringing inflation down to 2%.
In the last six months, Fed’s target interest rate has increased by 3%. This is the largest rate increase since the Great Inflation in the 1980s and 1990s. It is currently at 3.75% to 4.4%, which is the highest target since 2008’s financial crisis.
The Fed’s latest 75-basis point hike follows a report on consumer price indexes that showed inflation fell to 8.2% in the twelve months ended September. This number is much higher than economists expected.
The market was already anticipating a further rate hike of this size on Wednesday. However, the increase in interest rates was in line with what had been expected. However, some economists suggested that there was a chance that the Fed might relax a little and increase the rate by 50 basis points. This is due to growing concerns that the Fed’s more aggressive monetary policy may cause a recession.
The congressional Democrats pressed Powell to be more aggressive in approving Fed rate increases. They warned that tightening could pose a threat to the economy and the labor market.
This rate hike is yet another bad sign for President Joe Biden, and Democrats, just days before the midterm election. The 75-basis point increase in the rate is a sign that inflation is still very bad and increases the likelihood that the economy will enter recession. These are all points Republicans will use to bash the Democratic leadership of the country heading into next week.
Midterm elections will determine whether Democrats retain both chambers. This election is increasingly focusing on economics. Numerous polls show that this topic is more important than other wedge issues such as abortion, which have been the focus of headlines this year.
According to a Wall Street Journal poll, nearly half of respondents said that they believe Congress Republicans are the best to cool inflation. Only 27% said the same about Democrats.
The Fed has increased its projections of how long and hot inflation will continue throughout the year — making investors and Fed watchers more concerned about the country’s economic future.
Fed officials raised their inflation projections following the September meeting of its monetary policy committee. Inflation is now expected to be 5.4% by the year’s end, as opposed to 5.2% in June’s projection. For 2023 and 2024, inflation projections were slightly higher than June.
Inflation expectations have been rising and interest rate rises have increased. This has raised the possibility of a recession that could see hundreds of thousands of people lose their jobs. Negative gross domestic product growth was evident in the first two quarters this year, which is a common indicator of a recession. However, the strong labor market has kept the economy afloat. Another positive sign was the rebound in GDP in the third quarter.
However, economists, including the Fed, predict that the employment landscape will worsen over the next months as higher interest rates begin to impact the economy.
Now, the central bank predicts that the unemployment rate will rise to 3.8% at the end of this year and 4.4% in the next year. This is an acknowledgement of the economic effects of its tightening.
Many economists believe that the chances of an economy going into recession are better than those of avoiding one.
According to Bloomberg’s economic modeling, there is now a 100% chance that the U.S. will experience a recession by October next year. This is an increase of 65% compared to the previous version of the model.
