Key takeaways
- The Federal Reserve hiked interest rates for the sixth time this year on Wednesday
- The 75 basis point (0.75%) rate hike is the fourth consecutive hike of its size
- Though inflation remains at a 40-year high, mixed economic results suggest that financial pressures could soon ease for consumers
- Even so, Fed Chair Jerome Powell is committed to hiking rates until they’re “sufficiently restrictive” to beat down inflation
On Wednesday, the Federal Reserve hiked the federal funds rate target by another 0.75% in its fight against inflation. The U.S. central bank has raised rates six times this year, with November’s hike marking the fourth of this magnitude.
The Fed’s rate hikes continue unabated as inflation stubbornly clings near 4-year highs. In September, Consumer Price Index changes measured inflation at 8.2% year-over-year. Even after removing volatile food and energy prices, the index experienced one of its largest jumps since 1982.
How much will the Fed raise interest rates in the future?
As inflation and rate hikes bash consumers and investors from all sides, many grow weary of higher prices all around. But reprieve remains elusive: according to its recent policy statement, more Fed rate hikes lie ahead.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the statement reads. “The Committee anticipates that ongoing increases…will be appropriate [to attain] monetary policy that is sufficiently restrictive to return inflation to 2 percent.”
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Fed Chair Powell reiterated this point in a post-meeting news conference, stating that despite “significant uncertainty” regarding rates, “we still have some ways to go.” In particular, he’s concerned that inflation could become “entrenched” in economic expectations if the Fed doesn’t act decisively.
Powell also acknowledged the specter of recession lurking in the background. “No one knows whether there’s going to be a recession or not, and if so, how that recession would be,” he said. However, he added, it’s the Fed’s job “to restore price stability so that we can have a strong labor market that benefits all, over time.”
Unfortunately, that path could see interest rates “move to a higher level” than the 4.5-4.75% range proposed in September’s meeting.
One bright spot did come out of Wednesday’s meeting, however. Fed officials noted that future rate hike decisions would consider both past hikes and the time lag between Fed policies and their economic impacts. Powell also suggested that rate hikes could slow “as soon as the next meeting or the one after that.”
Rate hikes could potentially top 5%
Many economists agree that the Fed should focus on dragging down inflation despite the risk of economic backlash.
Federal Reserve Bank of Kansas City president Esther George mused this week that household “savings buffers” may be bolstering demand, adding that “that suggests we may have to keep at this for a while.”
Former U.S. Treasury Secretary Larry Summers opined in the Washington Post that unemployment may have to top 4.4% to wrestle inflation back to the Fed’s 2% benchmark.
Meanwhile, futures market data suggests that investors expect another 0.75% rate hike in December, followed by two 0.50% rate hikes to kick off 2023. That would bring the federal funds rate to a target range of 5-5.25%.
However, some economists – like Bob Schwartz of Oxford Economics – believe that a fed funds rate over 5% could trigger a recession. Pantheon Macroeconomics chief economist Ian Shepherdson seems to agree, writing in a client note that he doubts “Chair Powell’s tone will change significantly this week, but he won’t be able to hold back the tide if the numbers turn.”
Economic weakness on the horizon
Some experts have expressed concern that the Fed could be tackling inflation too aggressively in the face of developing economic weakness. One such expert is the Fed’s own Esther George, who noted this week that she’s concerned that “a succession of very super-sized rate hikes might cause [the Fed] to oversteer.”
Since the Fed’s September meeting, the economy has begun to hint that this point could be sooner, rather than later. For instance, U.S. monthly job growth more than halved between July and September from 537,000 to 263,000 new positions. Private sector compensation saw slowing growth too, down from 5.7% in Q2 to 5.2% in Q3.
Meanwhile, housing price growth has begun to decline at a rapid pace even as mortgage rates top 7%. Auto and credit card rates are also topping highs not seen in over a decade, meaning that future car and credit card payments could rise.
However, not everyone sees these signs of weakness as indicators that inflation is ready to give out.
Greg McBride, chief financial analyst at Bankrate, said in a statement this week, “Despite a rapidly cooling housing market, inflation has shown no signs of letting up, the labor market is still strong, and the economy is resilient. This forces the Fed to continue its aggressive approach on interest rates.”
He also argued that to curb inflation, borrowing costs will have to stay “higher for longer” to have an impact.
U.S. jobless claims toss in another wrinkle
On Thursday, the Labor Department also released its weekly U.S. jobless claims, reporting a smaller-than-expected 217,000 claims.
Just two days earlier, the Bureau of Labor Statistics reported that the U.S. saw 10.7 million job openings in September. All told, the month saw 1.9 openings for every unemployed person at the end of the month.
A decrease in the number of new unemployment claims alongside millions of open positions suggests that the labor market remains stronger than expected amid Fed rate hikes. While some industries like finance and tech have seen layoffs, other industries continue to hoard talent as labor remains scarce. (Particularly in service industries.)
That said, hiring has still declined in 2022. Moreover, layoffs are likely to start climbing if the Fed’s rate hikes do their job.
What do the Fed rate hikes mean for you?
Initially, stocks rose following the Fed’s policy statement hinted that rate hikes could slow in the near future. But after Fed Chair Powell noted that rate hikes would merely slow, not stop, in such a scenario, the market bucked, shedding its optimistic gains.
The seesawing stock gains represent a common theme for investors this year: brief glimpses of gains, often followed by additional losses.
This pattern has emerged as Fed rate hikes have increased the cost of borrowing for investors and consumers. As borrowing grows costlier, consumers stop purchasing as many products or switch to cheaper alternatives. Meanwhile, businesses ease up on growth initiatives or implement cost-cutting measures like layoffs to reduce the impact to their bottom line.
This process is no accident – it’s exactly what the Fed hopes to accomplish. By gumming up growth and making spending and investing more expensive, inflation may slow or even reverse. Already, mortgage rates have gone up as housing prices drop; credit card rates have increased by three percentage points this year; and auto loan rates have jumped over 1.5% this year.
However, continued rate hikes can drag down stock prices and making investing less appetizing. Though higher savings account yields can reduce the bite, a rosy 3.5% high-yield savings rate can’t make up for inflation topping 8%. (Nor can it top the average 10% annual returns the stock market has historically produced.)
Protect against the Fed’s rising interest rates with Q.ai
As Fed rate hikes continue and inflation remains stubbornly elevated, investors are having a hard time finding a place to park their funds.
On one hand, the stock market has taken a brutal beating this year. While it may generate returns again soon, there’s no telling when – or how much – potential it holds in the near-term.
And as we noted above, high-yield savings accounts just don’t fill in the gaps enough.
That’s why we here at Q.ai built our AI-backed Inflation Kit: to remove the sting from rising prices. While your wallet is slammed from all directions, our artificial intelligence works to maximize your inflation-based returns.
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