Fed announces third consecutive 75 basis point rate hike

The Federal Reserve announced its third consecutive 75 basis point rate hike on Wednesday as it continues to fight high inflation. (iStock)

The Federal Reserve raised interest rates again by 75 basis points on Wednesday. This was the third consecutive 75 basis point increase and the fifth rate hike this year.

The move came as the Fed continues to fight high inflation, which stood at 8.3% annually in August. This was a slight improvement from July, but still remains near the 40-year high from earlier this year and well above the central bank’s target annual average of 2%.

The increased federal fund interest rate also increases interest rates on products such as personal loans, mortgages, student loans and credit cards.

The rate hike pushes the Federal Funds rate to a target range of 3% to 3.25%, and the Fed said it expects more rate hikes on the horizon as it is “strongly determined to bring inflation back to its target range.” target of 2%”.

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Can the Fed cut inflation quickly?

While the Federal Reserve is maintaining its monetary policy and forecasting more rate hikes, it indicated that pushing back inflation could take longer than previously expected.

“At 3%, the percentage is now above what most FOMC members consider to be the long-term level and should be effective over time in reducing demand and slowing inflation,” Mike Fratantoni, Mortgage Bankers Association (MBA) senior vice president and chief economist, said in a statement.

“FOMC members’ forecasts point to slower growth, slowly declining inflation and a fed funds rate likely well above 4%,” Fratantoni said. “The surprise to the market could be the median expectation that they can raise rates to 4.4% by the end of this year.”

The Federal Open Market Committee (FOMC) raised its projection for interest rates towards the end of the year, showing that bringing inflation down could be a longer process than originally envisioned. FOMC members have raised their year-end yield forecasts from 3.4% to 4.4% and expect rates to remain at or above 4% through 2024.

“Focus on the Fed’s rate decision is completely ignoring what matters most,” Morning Consult chief economist John Leer said in a statement. “FOMC members have significantly increased their forecasts for inflation, unemployment and interest rates for the next two years and lowered their GDP growth forecasts. Even the Fed is less and less confident in its ability to deliver a soft landing.”

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Is a recession ahead?

Back-to-back negative GDP readings in the first half of 2022 sparked some debate about whether or not the US is in a recession. Typically, economists consider a recession to be a recession after two consecutive quarters of negative GDP growth. But the White House has said that may not be the case in this case.

The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that spreads across the economy and lasts for more than a few months.” The agency will typically wait as long as a year to declare that a recession has begun.

If the US is not currently in a recession, the ongoing rate hikes could soon cause one, an expert said.

“High interest rates are limiting consumption and investment activity by increasing the cost of borrowing funds,” Dawit Kebede, senior economist for the Credit Union National Association (CUNA), said in a statement. “This is slowing the economy and increasing the chances of a recession as GDP has fallen over the past two quarters.

“The move will also raise the unemployment rate from its current low level,” continued Kebede. “The aim is to create some slack in the labor market. Currently, the demand for labor is stronger than the supply, leading to faster wage growth which creates more inflationary pressures.”

If you want to take advantage of interest rates before they rise further, consider refinancing your mortgage to potentially lower your interest rates and lower your monthly payment. To see if this is the right option for you, contact Credible to speak with a home loan expert and get all your questions answered.

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