Borrowing costs

Fed raises rates another 75 basis points, pushing borrowing costs to highest level since Great Recession

Topline

The Federal Reserve on Wednesday doubled down on its most aggressive economic tightening campaign in three decades, raising interest rates an additional three-quarters of a percentage point and pushing borrowing costs to the highest level since the Great Recession in an attempt to to help temper the country’s stubbornness. high inflation, even as experts fear hawkish tightening could push the economy into recession.

Highlights

Following its two-day policy meeting on Wednesday, the Federal Open Markets Committee said it would raise the federal funds rate (the rate at which commercial banks borrow and lend reserves) by 75 basis points for the third consecutive meeting to a target rate of 3% to 3.25%, the highest level since 2008.

Even though Fed Chairman Jerome Powell argued for a slower pace of tightening after the last increase in July, Fed officials changed their minds after the Labor Department announced that the Consumer prices had risen more strongly than expected in August, suggesting that the central bank had more work to do. do before controlling inflation.

Officials also said they expect the fed funds rate to be around 4.4% by the end of the year, suggesting they will raise rates by at least 50 basis points for next two meetings; shares fell immediately after the news, with the Dow Jones Industrial Average reversing gains to trade down 100 points.

Fed policymakers began raising rates in March, as they had been warning for months, but expectations about the pace and intensity of future rate hikes have turned more aggressive amid stubborn price gains and criticisms that the central bank waited too long to start hikes; at one point this month, bond markets priced a one-in-four chance of a full point rate hike.

By making borrowing more expensive and thus tempering demand, rate hikes are key to tackling inflation, but ‘growing fears’ that the hikes could trigger a recession by undermining economic growth are the ‘driving forces’ of recent market weakness, notes analyst Tom Essaye of the Sevens report.

Key Context

The market suffered its worst performance in months last week after worse-than-expected August inflation data showed prices jumping 8.3% year-on-year and fueling concerns that Fed officials may need to act more aggressively to stifle inflation. The S&P is down 10% from its August peak and has plunged almost 20% this year. “The Fed still has work to do,” Bank of America’s Savita Subramanian wrote in a recent note. “The lessons of the 1970s tell us that premature easing could lead to a new wave of inflation and that short-term market volatility could be a lower price to pay.”

To monitor

The next Fed policy meeting will end on November 2. Goldman Sachs economists expect policymakers to raise rates by 50 basis points at this 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 will likely keep interest rates high longer to offset inflation concerns. that have persisted for more than a year — “even if it requires more economic pain,” as officials warned last month. Lerner points out that fund managers surveyed by Bank of America are showing signs of extreme decline, hoarding cash at the highest level since 2001 and limiting equity exposure (to record lows) as global economic growth expectations approach historic lows in light of central bank tightening efforts.

crucial quote

“The most important and growing downside risk to the market is the increased risk of recession as the Fed tightens aggressively in a slowing economy,” Lerner said. “Historically, once inflation has risen above 5%, it has usually taken a recession to bring it back down.” This has always been the case since at least 1970.

Further reading

The Dow Jones falls 400 points as the Fed prepares another interest rate hike (Forbes)

Inflation jumped 8.3% in August (Forbes)

Recession watch: Stock market rally ‘over’ as unemployment starts to rise and fears escalate (Forbes)