Fed Raises Interest Rates Another 50 Basis Points—Signals More Hikes To Come Next Year

Topline

The Federal Reserve on Wednesday eased up on its most aggressive economic tightening campaign in three decades, raising interest rates by 50 basis points (after four consecutive three-quarter-point hikes) but leaving the door open for additional hikes next year, as signs abound that the economy is slowing down enough to help cool the nation’s stubbornly high inflation.

Key Facts

At the conclusion of its two-day policy meeting on Wednesday, the Federal Open Markets Committee said it would raise the federal funds rate (the rate at which commercial banks borrow and lend reserves) by 50 basis points to a target range of 4.25% to 4.5%—the highest level since early 2008.

In the announcement, officials said ongoing increases “will be appropriate” in order to help bring inflation down to the Fed’s target level.

In an email, Vital Knowledge founder Adam Crisafulli called the announcement “more hawkish than expect and a modest negative for stocks,” pointing out the Fed now projects rates could climb to 5.1% next year (more than the 4.8% previously expected).

Though they rose earlier on Wednesday, stocks fell immediately after the announcement, with the S&P 500 dipping nearly 0.5% by 2:15 p.m. ET.

The decision comes after data on Tuesday showed inflation grew at the slowest pace since December last month, climbing 7.1% on an annual basis despite economists expecting a reading of 7.3%.

The report was “unambiguously good news” for consumers and the Fed, Bank of America analysts wrote in a Wednesday note, but they warned “the hard work of getting inflation back to [the Fed’s historical target] 2% still lies ahead,” as Fed Chair Jerome Powell has stated before.

What To Watch For

After the inflation report on Tuesday, economists at Goldman Sachs said they expect the Fed will again temper its policy at its following meeting in January, raising rates by 25 basis points.

Key Background

The Fed began raising rates as inflation reached a 40-year high in March, but expectations for the pace and intensity of incoming rate hikes have grown more aggressive amid stubborn price gains and criticism that the central bank waited too long to start the hikes. The increases, which work to slow inflation by tempering consumer demand, have already tanked the housing and stock markets: The S&P is down 16% this year, and existing home sales have plummeted 24%.

Further Reading

Inflation Hits Nearly One-Year Low—But These Prices Are Still Rising The Most (Forbes)

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