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On Wednesday, the apex bank its increased its interest rate to between 4.25% and 4.5%, marking the highest level in 15 years.
The Federal Reserve has hiked the interest rate to its highest level in 15 years. On Wednesday, the apex bank announced it was increasing rates to half a percentage point – between 4.25% and 4.5%. Following this increase, the Federal Open Market Committee (FOMC) indicated that it would maintain higher rates through next year. According to the bank’s officials, there would likely not be any reductions until 2024. In addition, the FOMC said that its projected terminal rate or point for ending the hikes is 5.1%. This represents a target range of 5%-5.25%.
By raising rates to their highest level in 15 years, the Fed indirectly indicates that the challenge of reeling in inflation is not over. This perception contradicts the previously widely-acknowledged promising signs that inflation may be diminishing.
The latest increase broke a string of four consecutive 75 basis point rate hikes, which marks the most aggressive policy in approximately 40 years. At a press conference, Fed Chair Jerome Powell pointed out the importance of sustaining the battle against inflation. According to Powell, these inflation control measures avert the entrenchment of higher price expectations. The Fed Chair noted:
“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to have confidence that inflation is on a sustained downward path.”
The FOMC continues to monitor the situation closely.
Stocks Decline as Fed Hikes Interest Rate to Highest Level in 15 Years
Investors reacted poorly to suggestions that rates may stay higher for longer, causing stocks to decline. For instance, the S&P 500 snapped its 2-day winning streak, slipping 0.61% to 3,995.32. In addition, the Nasdaq Composite fell 0.76% to 11,170.89, while the Dow Jones Industrial Average declined 142.29 points, or 0.42%, to 33,966.35. Morgan Stanley Investment Management’s Jim Caron weighed in on the latest Fed fiscal decision and why it dampens investor confidence. As Caron put it:
“The big issue that makes it hawkish is that the Fed’s forecasts put the terminal rate at 5.1% for 2023 from 4.6% at the September meeting. There’s no tip of the hat to the notion that [the pace of] inflation is starting to decline. They just completely ignored it.”
It remains to be seen how the Fed’s latest rate hike, at its highest level since December 2007, will affect a weakening economy in 2023. Furthermore, analysts opine that the Fed will pause its monetary tightening policy when the fund rate hits the 5.1% median level next year. The consensus projected rate cuts to a full percentage point in 2024, eventually resulting in a 4.1% funds rate. In addition, 2025 could see further percentage point cuts to a rate of 3.1% before the benchmark arrives at a 2.5% longer-run neutral level.
Amid its present inflation control measures, the Federal Reserve has also utilized quantitative tightening. This measure entails allowing maturing bond proceeds to roll off its balance sheet every month rather than reinvesting them.