The Fed announces the third consecutive rate hike of 75 basis points

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

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

The move came as the Fed continues to fight high inflation, which hit 8.3% annually in August. This was a slight improvement from July, but still remains close to the 40-year high set earlier this year and is much higher than the central bank’s preferred 2% annual average.

The federal funds rate hike also raises interest rates on products such as personal loans, mortgages, student loans, and credit cards.

The rate hike brings the federal funds rate to a targeted range of 3% to 3.25%, and the Fed said it expects further rate hikes to come on the horizon as it is “heavily committed to bringing the inflation to its 2% target “.

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Can the Fed Reduce Inflation Quickly?

Although the Federal Reserve maintains its monetary policy and expects further rate hikes, it has indicated that the reduction in inflation may take longer than expected.

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

“FOMC members’ projections point to slower growth, a slowdown in inflation and a federal funds rate that is likely to exceed well over 4%,” said Fratantoni. “The surprise for the market could be the median expectation of being able to raise rates to 4.4% by the end of this year.”

The Federal Open Market Committee (FOMC) has increased its projection for interest rates by the end of the year, showing that lowering inflation may be a longer process than initially anticipated. FOMC members have increased their projections for year-end interest rates from 3.4% to 4.4% and expect rates to remain at or above 4% until 2024.

“Focusing on the Fed’s interest rate decision totally loses what’s most important,” said John Leer, chief economist at Morning Consult. “FOMC members significantly increased their projections for inflation, unemployment and interest rates over the next two years and lowered their GDP growth forecasts. The Fed is also becoming less confident in its ability to achieve a soft landing.” .

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Is there a recession on the horizon?

Consecutive negative readings of GDP in the first half of 2022 have created a debate on whether or not the US is in a recession. Typically, economists view a recession after two consecutive quarters of negative GDP growth. But the White House said it may not be the case in this case.

The National Bureau of Economic Research defines a recession as “a significant decline in economic activity spread throughout the economy and lasting more than a few months.” The office typically waits up to a year before declaring that a recession has started.

If the US isn’t currently in a recession, continuing interest rate hikes could soon trigger one, an expert said.

“High interest rates limit consumption and investment activity by increasing the cost of borrowed funds,” Dawit Kebede, senior economist with the Credit Union National Association (CUNA), said in a statement. “This slows the economy down and increases the likelihood of a recession considering that GDP has slipped over the past two quarters.

“The move will also raise the unemployment rate from its current low,” Kebede continued. “The intent is to create some slowdown in the labor market. Currently, demand for labor is stronger than supply, leading to faster wage growth which is adding greater inflationary pressure.”

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

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