Fed raises interest rates by another 75 basis points – pushes borrowing costs to highest level since great recession

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The Federal Reserve on Wednesday doubled down on its most aggressive economic tightening campaign in three decades, raising interest rates by an additional three-fourths of a percentage point and pushing borrowing costs to the highest level since the Great Recession amid stubbornly high inflation — even as experts worry, the aggressive tightening could push the economy into recession.

Key facts

At the end of its two-day policy meeting on Wednesday, the Federal Open Markets Committee said it would raise the federal fund rate (the rate at which commercial banks borrow and lend reserves) by 75 basis points for the third meeting in a row to reach a target rate of 3% to 3 percent. .25% – the highest level since 2008.

While Fed Chair Jerome Powell made a case for slowing the pace of tightening after the latest hike in July, Fed officials changed their tone after the Labor Department reported that consumer prices rose more than expected in August, suggesting that the central bank has more work to do. to do before taming inflation.

Officials also said they expect Federal Funds interest rates to be around 4.4% by the end of the year, suggesting they will raise rates by at least 50 basis points over the next two meetings; stocks fell immediately after the announcement, with the Dow Jones Industrial Average reversing earnings and falling 100 points.

Fed policymakers began raising rates in March after months of raising interest rates, but expectations for the pace and intensity of future rate hikes have become more aggressive amid persistent price hikes and criticism that the central bank waited too long to start rate hikes; at some point this month, bond markets had priced in a one-in-four chance of a full-point rate hike.

By making borrowing more expensive and thereby dampening demand, rate hikes are key to fighting inflation, but “growing fears” that the hikes will fuel a recession by undermining economic growth are the “drivers” behind recent market weakness, notes Sevens report analyst Tom Essaye.

key background

The market last week saw its worst performance in months after worse-than-expected August inflation data, which showed prices were up 8.3% year over year, fueling concerns that Fed officials may need to act more aggressively to suppress inflation. . The S&P is down 10% since its peak in August and is down nearly 20% this year. “The Fed has more work to do,” Bank of America’s Savita Subramanian wrote in a note recently. “Lessons from the 1970s teach us that premature easing could lead to another wave of inflation — and that short-term market volatility could be a lower price to pay.”

What to watch out for

The Fed’s next policy meeting ends on Nov. Economists at the Goldman Sachs project will raise interest rates by 50 basis points during that meeting and another 50 basis points in December.

Tangent

In a note to clients, Keith Lerner, chief market strategist at Truist Advisory Services, said he expects the Fed to likely keep rates high for longer to offset inflation challenges that have persisted for more than a year — “even if it requires more economic pain,” officials warned last month. Lerner points out that the fund managers surveyed by Bank of America are showing signs of extreme bearishness, piling cash to the highest level since 2001 and limiting exposure to equities (at record lows) as global economic growth expectations nearly bottom out in light of the recession. tightening efforts by the central bank.

Crucial Quote

“The biggest and growing downside risk to the market is mounting recession risk as the Fed tightens aggressively in a slowing economy,” Lerner said. “Historically, once inflation got above 5%, it generally took a recession to bring it back down.” That has always been the case since at least 1970.

Read further

Dow falls 400 points as Fed prepares for another rate hike (TBEN)

Inflation rose 8.3% in August (TBEN)

Recession warning: Stock market rally ‘over’ as unemployment starts to rise and fears mount (TBEN)

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