World News | Fed hikes rates sharply again, but hints at pullback

WASHINGTON, Nov. 2 (AP) The Federal Reserve raised its benchmark interest rate by three-quarters of a point for the fourth time in a row on Wednesday, but signaled that it may soon reduce the rate hikes.

The Fed’s move raised its key short-term interest rate to a range of 3.75% to 4%, the highest level in 15 years. This is the central bank’s sixth rate hike this year — making mortgages and other consumer and business loans increasingly expensive and raising the risk of a recession.

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But in a statement, the Fed signaled that it may soon move to a more cautious pace of rate hikes. It said the cumulative impact on the economy of sharp rate hikes would be considered in the coming months. It noted that rate hikes will take time to fully impact growth and inflation.

Those words suggest that Fed policymakers may think borrowing costs are already high enough to potentially slow the economy and lower inflation. If so, that’s a sign they don’t need to raise rates as quickly as they did before.

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Still, for now, rising prices and higher borrowing costs are weighing on American households and undermining the ability of Democrats to campaign on a healthy job market as they try to retain control of Congress.

In the run-up to the midterm elections, which ended on Tuesday, Republican candidates lashed out at Democrats over the punitive effects of inflation.

The Fed’s statement on Wednesday came after its most recent policy meeting. Many economists expect Fed Chairman Jerome Powell to say at a news conference that the Fed’s next expected rate hike in December may be just half a percentage point, not three-quarters.

Typically, the Fed raises rates in 25 basis point increments. But after erroneously downplaying inflation as likely temporary last year, Powell led the Fed to aggressively raise interest rates in an attempt to slow borrowing and spending and ease price pressures.

Wednesday’s latest rate hike coincides with growing concerns that the Federal Reserve could tighten credit enough to derail the economy. The government reported that the economy grew last quarter and employers were still hiring at a solid pace. But the housing market has collapsed, and consumers have barely increased their spending.

Mortgage buyer Freddie Mac reported that the average rate on a 30-year fixed mortgage, which was just 3.14% a year ago, topped 7% last week. Sales of existing homes have fallen for eight straight months.

Blerina Uruci, an economist at T. Rowe Price, said the drop in home sales was a “canary in the coal mine,” a sign that the Fed’s rate hikes are undermining highly rate-sensitive sectors such as housing. However, Uruci noted that the Fed’s rate hikes have yet to significantly slow much of the economy, especially the job market or consumer demand.

“As long as these two components remain strong,” she said, Fed policymakers “cannot expect inflation to decline over the next two years” near the 2 percent target.

Several Fed officials said recently that they have yet to see meaningful progress in the fight against rising costs. Inflation rose 8.2% in September from 12 months ago, just below the highest level in 40 years.

However, policymakers may think they will soon slow the pace of rate hikes, given some early signs that inflation may begin to decline in 2023. Squeezed by high prices and high-cost lending, consumer spending has barely grown. Supply chain disruption is easing, meaning fewer shortages of goods and parts. Wage growth has leveled off, and if there is a subsequent decline, it will ease inflationary pressures.

However, the job market remains strong, which could make it harder for the Fed to cool the economy and keep inflation in check. This week, the government reported that companies posted more job openings in September than in August. There are now 1.9 available jobs per unemployed worker, an unusually large supply.

Such a high rate means employers are likely to keep raising wages to attract and retain workers. These higher labor costs are often passed on to customers in the form of higher prices, fueling more inflation.

Ultimately, Goldman economists expect Fed policymakers to raise key interest rates to nearly 5% by March. That was higher than the Fed had forecast in a series of forecasts leading up to September.

Outside the U.S., many other major central banks are also raising rates rapidly in an attempt to bring down inflation that is even higher than in the U.S.

Last week, the European Central Bank announced its second sharp rate hike in a row, the fastest in euro history, in an attempt to contain inflation that soared to a record 10.7% last month.

Likewise, the Bank of England is expected to raise interest rates on Thursday in an attempt to ease consumer prices, which rose at the fastest pace in 40 years in September to 10.1%. Even as they raise interest rates to fight inflation, both Europe and the UK appear to be slipping into recession. (Associated Press)

(This is an unedited and auto-generated story from the Syndicated News feed, the body of the content may not have been modified or edited by LatestLY staff)