Interest Rate at Highest Level Since 2008 Financial Crisis Following Massive Fed Hike

The Federal Reserve has conducted another massive interest rate hike as the economy struggles with smoldering inflation and the rising risk of recession.

Following a two-day meeting of the Federal Open Market Committee in Washington, the central bank announced that it would hike its interest rate target by three-quarters of a percentage point, or 75 basis points. The move marks the third consecutive rate hike of that scale, a historically aggressive course of action that shows the Fed’s resolve to drive down inflation.

The Fed’s interest rate target has risen by 2.25% in the past four months, the most forceful rate hikes since the Great Inflation of the late 1970s and early 1980s. The target is now 3% to 3.25%, the highest it has been since the financial crisis in 2008.

“We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses,” Fed Chairman Jerome Powell said. “Over the coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate.”

The latest 75 basis point hike comes on the tail of a hotter-than-expected consumer price index report from August, which found inflation ticked down to 8.3% for the 12 months ending in August — a number that is higher than economists had expected.

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Prior to Wednesday’s rate hike, some economists had become so convinced of the Fed’s resolve in driving down prices, even at the expense of the economy, that they were betting on an even larger full percentage point hike.

The officials also raised their projections for inflation. The median Fed official now sees inflation at 5.4% by the end of the year, compared to a June projection of 5.2%. Inflation projections were slightly more elevated than in June for both 2023 and 2024.

The Fed also upped its forecast for the unemployment rate in the coming months and years. It now predicts the unemployment rate will tick up to 3.8% by the end of the year and 4.4% by 2024, an acknowledgment of the effects its aggressive tightening will have on the economy.

The FOMC members also heavily slashed the GDP growth forecast for this year from the June projection of 1.7% down to 0.2% and revised down their GDP predictions for next year and 2024.

Inflation has made nearly every aspect of life less affordable, but energy and food prices have been particularly painful for consumers. The price of a gallon of gas in the United States now averages $3.68, a 49-cent increase from a year ago. It is worth noting that gas prices have tumbled from earlier this summer after they peaked at above $5 per gallon.

Food prices, as measured by the CPI, have also exploded beyond the 8.3% headline number. For instance, the average price of chicken has risen by about 16% on an annual basis, while flour has increased by 23.3%. Eggs have surged by nearly 40%, milk has gone up by 17%, butter and margarine have risen by more than 29%, and the average price of rice has grown by 13%.

The stock market has been mercurial and performing poorly since the August CPI report was released. The day the news broke of the report, markets had their worst day since around the start of the coronavirus pandemic more than two years ago, showing just how panicked investors are getting that the Fed will not be able to pull off a “soft landing” successfully.

A soft landing is a scenario in which the central bank, under the leadership of Powell, will be able to cool inflation to healthy levels without causing the economy to careen into a recession. While that prospect looked more achievable a couple of weeks back, the most recent inflation report and other indicators are showing that it appears to be a waning aspiration for the Fed.

Powell himself has acknowledged that engineering a soft landing will be a challenging proposition and used his annual speech in Jackson Hole, Wyoming, to temper expectations that the United States will be able to avoid recessionary conditions. He warned that the Fed would remain on course to smother inflation, even if it means some “pain” for households and businesses.

“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “Moreover, there will very likely be some softening of labor market conditions.”

Indeed, the past two quarters have featured negative gross domestic product growth, a scenario that economists have used as a barometer of recessions in the past. The current economic landscape, though, differs from historical recessionary periods in that the labor market is undeniably tight and unemployment is near the lowest it has been.

As the Fed continues to hike rates, as it did once again this week, the labor market is expected to cool, a sign that a recession is near. Still, even in the face of the rate hikes, August’s employment numbers clocked in higher than anticipated.

The economy added 315,000 jobs in August, and the unemployment rate ticked up slightly to 3.7%, still near the ultra-low level it was at prior to the pandemic.

The stronger job numbers likely imbued Fed officials with the confidence to conduct another 75 basis point hike because it shows the economy still has some strength in being able to weather the massive rate hikes. Jobless claims, a proxy for layoffs, have also been in decline — something that would traditionally run counter to the Fed hiking rates.

Still, there are some signs that the Fed’s historic tightening cycle is starting to crack the economy.

FedEx, one of the largest shipping companies in the world, last week caused the markets to panic after it withdrew its full-year guidance and warned that a global recession is brewing. The company said it expects first-quarter earnings to clock in at $3.44 per share, far below the average analyst estimate of $5.10.

FedEx CEO Raj Subramaniam indicated that he thinks the economy is entering into a “worldwide recession.”

Other signs are emerging in the housing market, which is typically the first sector dinged when the Fed starts raising interest rates because the action causes mortgage rates to rise, making homes less affordable.

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New and existing home sales have been in quick retreat, and other housing indicators, such as housing starts and new permits for construction, have, with some exceptions, been retreating in light of the higher mortgage rates. Homebuilder confidence, which gauges the market conditions in the single-family construction space, has also dropped off quickly and is now underwater.

The Fed is next set to meet in November. In the meantime, there will be a raft of economic reports, including inflation and labor market reports, that the central bank will analyze in determining where the federal funds rate will go next.