Interest Rates Rise Another 75 Basis Points

Federal Reserve officials signaled that their aggressive campaign to curb inflation could be entering its final phase, even as they delivered their fourth straight 75 basis point (bps) interest rate increase.

While central bankers said that “ongoing increases” will still likely be needed to bring rates to a level that are “sufficiently restrictive to return inflation to 2 percent over time,” they added fresh language to their statement after a two-day meeting in Washington. “The pace of future increases” in borrowing costs would take into account the cumulative tightening of monetary policy, the lag with which that works, and developments in the economy and finance, they said.

The additional language will spur speculation that Chair Jerome Powell and colleagues will slow the pace of rate increases, with many Wall Street economists anticipating they will downshift to a 50 bps increase when they next gather in December.

In financial markets, swaps traders cut the amount of pricing expected at the December meeting and pushed where they see the peak rate for the cycle to below 5 percent, from around 5.05 percent earlier Wednesday. Yields on two-year Treasuries plunged, while the S&P 500 index rallied and the dollar index slid.

The new commentary by the Federal Open Market Committee (FOMC) comes amid still-strong readings on inflation and jobs, even as sectors like housing and manufacturing have slowed substantially.

The Fed’s unanimous decision lifted the target for the benchmark federal funds rate to a range of 3.75 percent to 4 percent, its highest level since 2008.

Fighting to curb inflation running near a 40-year high, officials gathered days before midterm U.S. congressional elections in which anger over price pressures has been a dominant theme. The outcome of the November 8 vote could cost President Joe Biden’s Democrats control of Congress, and some prominent lawmakers in his party have started to publicly urge the Fed to show restraint. Powell, for his part, has tried to keep the central bank out of the political fray.

As expected, FOMC officials said they will continue to reduce their holdings of U.S. Treasuries and mortgage-backed securities, as planned—a pace amounting to about $1.1 trillion a year.

The higher rates go, the harder the Fed’s job becomes. Having been criticized for missing the stubbornness of the inflation surge, officials know that monetary policy works with a lag and that the tighter it becomes, the more it slows not only inflation, but also economic growth and hiring.

Fed forecasts in September implied a 50 bps move in December, according to the median projection. Those projections showed rates reaching 4.4 percent this year and 4.6 percent next year, before cuts in 2024. No fresh estimates were released at this meeting, and they won’t be updated again until officials gather December 13 to 14, when they will have two more months of data on employment and consumer inflation in hand.

Economists surveyed by Bloomberg late last month were looking for a 50 bps increase in December, but almost a third had penciled in a fifth 75 bps hike. They saw rates peaking at 5 percent next year.

Investors saw a similar path: Pricing in financial futures markets earlier on Wednesday was split between a 50 bps and 75 bps increase in December, with rates peaking slightly above 5 percent during 2023.

The Fed’s most forceful tightening campaign since the 1980s is beginning to cool some parts of the economy, particularly in housing. But policymakers have yet to see meaningful progress on inflation.

Nor has there been a significant loosening in the job market, with unemployment in September matching a half-century low of 3.5 percent.

Employer demand for workers has also remained strong, with 1.9 job vacancies for every unemployed person in America, according to Labor Department data Tuesday.

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