What the most recent Fed rate hike means

RALEIGH – The Federal Reserve has again raised interest rates for the federal funds rate with the target range now set between 3.75 and 4 percent, following today’s meeting of the Board of Governors.

That’s the fourth consecutive three-quarters or 75-basis points rate increase this year.

“Recent indicators point to modest growth in spending and production,” a statement distributed by the Federal Reserve following Wednesday’s meeting reads. “Job gains have been robust in recent months, and the unemployment rate has remained low.”

Earlier this week, the U.S. Bureau of Labor Statistics released data on job openings, showing a spike in job openings in September, greater than many analysts had expected.

And in the Triangle, too, job postings increased in September, though have fallen in recent weeks, the most recent WRAL TechWire Jobs Report found.

Across the US, number of job openings increased in September – but signs of a cooldown ahead

Why another rate hike?

The Federal Reserve can set the targets for the federal funds rate as one of the levers it can use to impact the economy. By raising interest rates, money becomes more expensive to borrow, for individuals and for companies.

But what the Federal Reserve is doing is looking to slow the economy down just enough that inflation also begins to subside, eventually falling back to where it has been historically, around 2% annually.

However, as the latest inflation data showed, the inflation rate remains high.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the Federal Reserve’s statement reads. “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 Committee is highly attentive to inflation risks.”

Workers’ pay keeps climbing – but not matching rising inflation

What’s next?

Dr. Michael Walden, a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University and a regular contributor to WRAL TechWire, told WRAL TechWire that he expected another 75-basis point rate hike would be announced today.

And the probability of such a hike was predicted by more than 90% of analysts and traders, as of midday, according to the CME FedWatch Tool.

But additional rate hikes could be on the way, including following the December 2022 meeting of the Federal Reserve, which will take place on December 14.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent,” today’s statement from the Federal Reserve reads.

Even before today’s announcement from the Federal Reserve, the CME FedWatch Tool measured expectations that another interest rate hike would be coming in December, with about a 47% chance of an additional 50-basis point rate hike and an about 47% chance of a fifth consecutive 75-basis point rate hike coming in December.

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Goal is 2% inflation rate

But the statement continues, noting: “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Walden told WRAL TechWire that he anticipates ” at least two more hikes of the same amount.”

Here’s what a rate hike might mean for you.

“The Fed will closely watch the economic data between now and their next meeting,” said Walden. “If the data consistently show a slowing in the economy – for example, weak job numbers, weak retail sales, and reductions in manufacturing output – then the next rate hike may be smaller – say, 0.5 % points.”

“But if the slowing is not widespread and significant, then I would predict another 0.75% point hike at the next meeting,” Walden said.

In the coming days, the Federal Reserve will obtain more data about the country’s employment situation, with the release of the so-called US jobs report by the U.S. Bureau of Labor Statistics. Later this month, additional inflation data will be released.

But those are not the only measures that will be considered.

“The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments,” today’s statement concludes.