Interest Rates Increase Again, Hints At More Smaller Increases

It signaled that it may be nearing an inflection point in what has become the swiftest tightening of US monetary policy in 40 years, even as it raised interest rates by three quarters of a percentage point again on Wednesday and said it will need to raise borrowing costs further in order to combat inflation.

According to the double-sided message, the Fed may increase rates in smaller increments in the future. In December, it is expected to end its series of three-quarters-point rate hikes in favor of more modest increases of perhaps half a percentage point, while leaving policymakers room to keep raising rates if inflation does not slow, according to Reuters.

A news conference following the Fed's latest policy meeting said Jerome Powell wanted to clarify this point: Even if policymakers scale back future increases, he said, they were still unsure how high rates would have to rise to curb inflation, and were determined to "stay the course until the job is done."

Powell said the target federal funds rate must reach a "sufficiently restrictive" level in order to slow inflation, regardless of how fast the Fed moves. "We're going to find it over time." The final destination is "very uncertain."

Rather than the question of when to moderate the pace of increase, it is more important to ask how high ... and how long to keep monetary policy restrictive, he said, adding that it was premature to discuss when the Fed might pause.

U.S. stock indices spiked after the Fed's statement, which promised to consider economic risks more clearly when determining the size of future rate rises, but erased those gains as Powell spoke and ended sharply lower. There was a 2.5% decline in the S&P 500 index (.SPX) and a more than 3% decline in the Nasdaq Composite (.IXIC).

Yields on U.S. Treasury securities, which had fallen sharply after the Fed statement, rose. The 2-year note – the bond maturity most sensitive to Fed policy expectations – was up 6 basis points to about 4.61%.

The Bank Policy Institute's chief economist, Bill Nelson, a former top Fed staffer, said before Powell's news conference that the Fed's policy statement appeared to prepare it for more rate hikes before the tightening cycle is over, delivered at a slower pace.

According to Nelson, the document "suggested that the Fed is aiming for a higher fed funds rate than is currently expected."

 

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