Feds Jack Interest Rates .75% to Help Slow Soaring Inflation: Wait, What? How in the Hell Does that Help Inflation?

The Federal Reserve plowed ahead on Wednesday announcing an interest rate hike of 0.75 percentage points, with the fifth straight since March and the fourth historically large interest rate hike, in its effort to slow down or halt the soaring inflation.

The rate-hike matches investor expectations and will bump the range of the federal interest rate to between 3.75-4%.

But as the Fed’s monthslong campaign increasingly risks a recession next year, the main question now is, will it dial back the rate hikes in December or wait until inflation shows clear signs of abating?

At a news conference, Fed Chair Jerome Powell said the Fed could slow the pace of hikes as soon as next month. “That time is coming and it may come as soon as the next meeting or the one after that,” Powell said.

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Powell added, “The Fed isn’t close to pausing its rate hike campaign and need to boost rates a good bit more to reach a level that’s sufficiently restrictive to lower inflation to the Fed’s 2% target. The concern is that inflation could become ‘entrenched’ in the expectations of consumers and businesses and the Fed must move decisively to head off such a dynamic.

Powell added, It’s very premature to be thinking about pausing. We have a way to go. Citing recent high inflation figures, rates could well rise above the 4.5% to 4.75% range that Fed officials previously anticipated.

Powell concluded, “The inflation numbers do suggest to me that we may move to a higher level than we thought at the September meeting. There’s no sense that inflation is coming down.” 

All eyes are now on the Fed’s December meeting with investors debating whether the Fed will continue at its aggressive pace of 0.75 percentage points or slow to 0.50 in a bid to ease the pressure on an economy that many analysts are saying is heading towards a recession.

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Some investors were hoping the Fed would begin a “pivot” towards reduced rate hikes in December after various signs that the economy was beginning to slow, according to a Reuter report on Tuesday. But, the Bureau of Labor Statistics report on Tuesday showed an unexpectedly strong labor market, with job openings in September nearly recouping an August decline, causing some investors to believe the Fed will likely see itself as having more work to do in prompting a slowdown.

Ronald Temple, head of U.S. equity at financial advisory firm Lazard Asset Management told Reuters, “The job openings data taken together with nonfarm payroll growth indicate the Fed is far from the point where it can declare victory over inflation and lift its foot off the economic brake,” pretty much confirming what Powell had said.

So-called “core inflation,’ which measures inflation less food and energy, ticked up to 5.1% year-on-year inSeptember, according to the Fed’s preferred inflation metric, the Personal Consumption Expenditures (PCE) price index. The more well-known Consumer Price Index (CPI) has repeatedly come in hot, with its most recent reading also showing soaring core inflation, up 0.6% on a monthly basis in September and up 6.6% on an annual basis.

Heightened rates have pushed people away from buying houses at the fastest rates on record, as 30-year fixed mortgage rates hit their highest levels in 20 years. Elevated interest rates are also putting pressure on the federal government, with the cost of interest on the $31.1 trillion national debt to surpass the $750 billion spent on defense this fiscal year by 2026, CNN reported.

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