Fed Raises Interest Rates by 0.75 Percentage Point to Highest Level Since 2008

Fed Raises Interest Rates by 0.75 Percentage Point to Highest Level Since 2008
Federal Reserve Board Chairman Jerome Powell speaks during a news conference in Washington on Sept. 21, 2022. (Saul Loeb/AFP via Getty Images)
Andrew Moran

The Federal Reserve raised the benchmark federal funds rate by 75 basis points to a target range of 3 percent to 3.25 percent on Sept. 21, matching market expectations. Fed officials indicated that further big increases were likely at two remaining meetings this year.

The Federal Open Market Committee (FOMC) has lifted its benchmark rate to its highest level since 2008, marking the committee's third consecutive three-quarter-point increase.

Markets had widely anticipated that the Fed was going to announce a 75-basis-point rate boost. However, due to a higher-than-expected August inflation report, there was some speculation that the Fed could surprise the markets with a 100-basis-point increase to the fed funds rate.

The Fed's so-called dot plot—a chart that shows each Fed official's forecast for short-term interest rates—was revised upward. Officials now expect rates to end the year at 4.4 percent, up from 3.4 percent in the prior forecast, and to reach 4.6 percent in 2023, up from 3.8 percent previously.

The Fed stated that it's "highly attentive to inflation risks."

"Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the FOMC said in a statement.

"Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity."

The futures market now sees an 89 percent chance of the Fed raising rates by an additional 75 basis points at the November FOMC meeting.

According to the Summary of Economic Projections, the Fed sees the median growth in real gross domestic product (GDP) to come in at 0.2 percent this year and 1.2 percent in 2023. That's down from the 1.7 percent forecasts in December for both years. At least one central bank official thinks the economy will contract 0.3 percent in 2023.

The unemployment rate is also estimated to rise to 3.8 percent in 2022 and 4.4 percent next year.

Stocks went on a roller coaster ride after the Fed’s announcement. While the market initially erased its gains, the leading benchmark indexes rallied after Fed Chair Jerome Powell told reporters that the Fed would consider slowing the pace of rate hikes.

“At some point, as the stance of monetary policy tightens further, it will become appropriate to slow the pace of increases while we assess how our accumulative policy adjustments are affecting the economy and inflation,” Powell said.

However, the leading benchmark indexes struggled to stay in positive territory after Powell’s press conference. The Dow Jones Industrial Average slid 522 points, or 1.7 percent. The S&P 500 dropped by 1.7 percent and the Nasdaq Composite fell 1.79 percent.

The U.S. central bank has been on an inflation-busting crusade since March, when it began its tightening cycle. However, Jason Brady, president and CEO at Thornburg Investment Management, says the Fed is still behind the curve.

"These are massive moves from a Fed that is still behind where they need to be to get inflation under control," he wrote in a note. "Now, it’s clear that we’ll have rates 'higher for longer,' a situation diametrically opposed to what markets have been used to for the last decade and a half."

There's a chance of a recession, according to Powell, and if the Fed has to keep tightening, it will increase that risk.

“A soft landing would be very challenging,” Powell said. “No one knows whether this process will lead to a recession or if so, how significant that recession would be.”

What Does This Mean for the Economy?

When interest rates rise, the cost of borrowing becomes more expensive for businesses, consumers, and governments. This manufactures a cascading effect as consumer demand wanes, business activity slows, investors invest less capital, and housing affordability diminishes.

While the objective behind a rising-rate campaign is to rein in inflation, the monetary policy directive can have broader consequences for the economy, especially one that's driven two-thirds by consumption.

After more than a decade of easy money policies, higher interest rates can "mean pain, pure and simple," according to Kirk Kinder, a financial planner at Picket Fence Financial.

"All asset prices have thrived on low rates: stocks, bonds, real estate. As rates rise, all of these assets, which were at historically high valuations, will come under pressure," he told The Epoch Times, noting that consumers will have less discretionary income and that corporate profits will take a hit.

"The economy had become so addicted to low rates that an increase like we have seen could spell disaster to the economy and markets. It's similar to taking drugs away from an addict. The withdrawal is painful."

But while Powell has said throughout most of 2022 that he would be attempting to steer the economy toward a so-called soft landing, he has ostensibly given up this rhetoric in favor of a "growth recession." This is when economic growth is tepid but not low enough to be defined as a technical recession, although the United States slipped into a technical recession following two straight quarters of negative GDP prints.

In addition to domestic issues, the Fed's rate hikes can also affect the international marketplace. As the central bank engages in quantitative tightening, it has strengthened the U.S. dollar to its highest level in more than 20 years.

The U.S. Dollar Index (DXY), which gauges the greenback against a basket of currencies, has surged by 15 percent year-to-date to roughly 110.00. A stronger dollar can make it more expensive for foreign participants to purchase U.S. goods and services.

The next two-day FOMC policy meeting will take place on Nov. 1 and Nov. 2. The Fed's future action might depend on the next consumer price index and jobs reports. For now, the market is penciling in another 75-basis-point boost. But a lot could change between now and when Fed policymakers next gather.
At this stage, "the Fed might overtighten," according to Jeff Gundlach, CEO of DoubleLine Capital.