The Federal Reserve raised interest rates by another 75 basis points on Wednesday, the latest sign that monetary policymakers are serious about combating the upward pressure on inflation.
The Federal Reserve held its Federal Open Market Committee (FOMC) meeting on November 2, announcing the sixth consecutive rate hike this year and the fourth straight three-quarter point increase. So far, the Fed has raised interest rates five times in 2022: +0.25% in March, +0.50% in May, and +0.75% in June, July, September, and November.
The Federal Funds Benchmark Rate — the Fed’s foremost monetary policy tool — increased to 4% in November, up from 0.08% in January. The Fed’s 4% benchmark rate is considered “restrictive territory” for its ability to slow economic growth by increasing the cost of mortgages and business loans.
Chairman Jerome Powell has made it clear that the Fed would maintain a more restrictive policy stance until sufficient evidence would deem it appropriate to slow or pause rates.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” Powell said in a news statement following the FOMC meeting. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
Powell said he is looking for three key indicators before the Fed reverses its restrictive policy stance and lowers rates, which he says is still a way(s) off.
“It is very premature to be thinking about pausing. … Very premature,” Powell said during Wednesday’s follow-up news conference with reporters.
The three indicators Powell is targeting are 1) a period of below-trend growth, 2) a softening labor market, and 3) inflation on pace to 2%.
Despite lower growth in the first half of the year, the U.S. economy grew by 2.6% during the third quarter of 2022, according to the latest GDP report by the Bureau of Economic Analysis. Consumer strength has also remained robust due in part to a strong labor market and high inflationary wages.
The job market remains resilient, despite mass layoffs in several sectors, particularly in the tech industry. During September, the U.S economy added 263,000 jobs, and the unemployment rate edged down to 3.5%, according to the U.S. Bureau of Labor Statistics. The number of job openings also increased, rising by 437,000 to 10.7 million.
“The Fed would like to see the ratio of vacancies to unemployed workers decline, and it ticked up in September to 1.86 from 1.68,” tweeted Nick Timiraos, chief economics correspondent for The Wall Street Journal.
Considering inflation is hovering near a four-decade high, it is no surprise that the Fed issued another aggressive rate hike. September’s inflation reading came in at 8.2% year over year, rising 0.4% in September on a seasonally adjusted basis after rising 0.1% in August, according to October’s Consumer Price Index (CPI) report.
Another 50-basis point rate hike is expected next month to close out the year. The final FOMC meeting for 2022 is set for December 13-14.