September 21, 2022: Fed raises interest rates by three-quarters of a percentage point

US stocks ended the day lower Wednesday following the news of a third straight three-quarters of a percentage point interest rate increase by the Federal Reserve. The move was not surprising, but Fed chair Jerome Powell strongly suggested that more big rate hikes are coming as the central bank continues to fight inflation.?

With the Fed’s latest rate hike, the “pain” that Chair Powell has been warning about will take many forms, including job losses, which the central bank chief euphemistically calls “softening in the labor market.”

Critics such as Senator Elizabeth Warren have repeatedly called out the risk of raising unemployment, which is currently near historic lows at around 3.7%. When interest rates go up, business activity slows, leading to less hiring and more layoffs. The Fed now expects unemployment to reach 4.4% next year, which would amount to more than 1.3 million jobs lost.

“Chair Powell just announced another extreme interest rate hike while forecasting higher unemployment,” Warren tweeted. “I’ve been warning that Chair Powell’s Fed would throw millions of Americans out of work — and I fear he’s already on the path to doing so.”

Powell reiterated in a news conference that the short-term pain is far preferable to the longer-term pain of letting inflation run rampant. Slower growth and higher unemployment “are all?painful for the public that we serve, but they’re not as painful as failing to restore price stability and having to come back and do it down the road again,” he said.

To set the labor market up for another strong period, he added, we have got to get inflation behind us.

“I wish there were a painless way to do that. There isn’t.”

Curing inflation is like driving with a blindfold: You might not know that you’re on the wrong path until you bump into something.

The Fed has a tool to combat high prices: Raising its target interest rate. But that historically works with a lag. So the Fed wants to keep hiking rates … but cautiously so it doesn’t inadvertently raise them too high and crash the economy.

“Changes in financial decisions begin to affect economic activity within a few months. But it’s likely to take some time to see the full effect on inflation,” Federal Reserve Chairman Jerome Powell said Wednesday. “So we are very much mindful for that. And that’s why … it will become appropriate to slow the pace of rate hikes while we assess how adjustments are affecting the economy.”

My colleague, Nicole Goodkind, asked Federal Reserve Chairman Jerome Powell this afternoon to clarify what he means by a “reset” in the housing market.

Goodkind noted that existing home sales have fallen for seven months straight and mortgage rates are the highest since 2008, yet mortgage demand continued to increase and housing prices are still elevated.

“When I say ‘reset,’ I’m not looking at a particular, specific set of data or anything,” Powell said. “What I’m really saying is that we’ve had a red-hot housing market all over the country where, famously, houses were selling to the first buyer at 10% above the ask before even seeing the house, that kind of thing. So, there was a big imbalance between supply and demand.”

Powell said housing prices were going up at an unsustainably fast level. The “reset” should “help bring prices more closely in line with rents and other housing market fundamentals.”

“That’s a good thing,” Powell said. “For the longer term, what we need is supply and demand to get better aligned so housing prices go up reasonably and people can afford houses again.”

Stocks were all over the place Wednesday, alternating between gains and losses after Federal Reserve chair Jerome Powell continued to talk about the need to fight inflation. (We lost track of the number of times he discussed “price stability” as being job number one for the Fed.)

The Dow, which fell shortly after the latest rate hike was announced, surged at the beginning of Powell’s press conference but was flat with less an hour to go before the closing bell. The S&P 500 rose about 0.4% and the Nasdaq gained 0.6%.

Investors are already preparing for another big rate hike in November. Federal funds futures listed on the CME are pricing in a more than a 70% chance of another three-quarters of a percentage point rate hike on November 2.

That would be the fourth consecutive hike of that magnitude and would bring rates up to a range of 3.75% to 4%.

Federal Reserve Chairman Jerome Powell said Wednesday that the Fed remains committed to getting inflation down to a healthy 2% annual growth. But, as Powell has said before, it will be painful getting there.

“To accomplish that, we’ll need to do two things in particular: … a period of growth below trend and softening in labor market conditions to foster a better balance,” Powell said.

The Fed now expects the American economy will grind to a near halt this year, and the unemployment rate will rise a percentage point by then.

Federal Reserve Chairman Jerome Powell said Wednesday that the Fed will continue to hike rates as it looks to control inflation. But it can’t raise rates forever without plunging the economy into a recession.

That’s why Powell said the Fed will eventually have to pace out the rate hikes.

“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 will be appropriate,” Powell said. “At some point as the stance of policy tightens, it will be appropriate to slow the pace of increases while we assess how our policy adjustments affect the economy.”

Stocks rose after Powell sounded that somewhat optimistic note. The S&P 500 and Dow were about flat, and the Nasdaq rose 0.2%.

The Fed’s new projections show the growing risk of a hard landing, where monetary policy tightens to the point of triggering a recession. They also provide some proof that the Fed is willing to accept “pain” in economic conditions in order to bring down persistent inflation.

The higher prices mean that consumers are spending around $460 more per month on groceries than they were this time last year, according to Moody’s Analytics.

Still, the job market remains strong, as does consumer spending. Housing prices remain high in many areas, even though there has been a substantial spike in mortgage rates. That means the Fed may feel that the economy can swallow more aggressive rate hikes.

The Fed’s third consecutive three-quarters of a percentage point rate increase was widely expected. But what got markets moving was the so-called dot plot, which shows the projected target range for interest rates by the end of the year from all the Fed members. That went from 3.4% in June to an estimated 4.4% by the end of this year.

That suggests the next two meetings will include yet another 75-point hike and a 50-point hike. Wall Street was counting on a 100 basis points increase, not 125, and investors are notoriously averse to unexpected changes, even if it’s just a couple dozen basis points.

All three major US equities indexes slipped after the Fed announcement.

“It will be really important to see if Powell blesses the dots and another 75 bps in November,” wrote Peter Boockvar, chief investment officer for Bleakley Financial Group. “Either way, the Fed has now entered the ‘Danger Zone’ in terms of the rate shock they are throwing onto the US economy.”

Stocks fell after the Federal Reserve approved a third consecutive three-quarter-point interest rate hike. Investors had been closely watching for how aggressive the central bank would be in its battle to curb inflation. Higher interest rates generally hurt corporate earnings and stock prices.

The Dow fell by 244 points, or 0.8%.

The S&P 500 was down 0.8%.

The Nasdaq Composite slid 0.9% higher.

Consumers and investors need to get used to significantly higher interest rates as the Federal Reserve looks to fight inflation … even though that may slow the economy to a crawl.

The Fed indicated in its so-called dot plot Wednesday that the median forecast for where rates will finish 2022 is now 4.4%. That’s up from a projection of 3.4% in June. The Fed raised rates again Wednesday to a range of 3% to 3.25%, a three-quarters of a percentage point increase.

But the Fed also cut its outlook for economic growth. Central bankers now have a median forecast of just a 0.2% annualized increase in America’s gross domestic product. That’s down from expectations of 1.7% in June.

The Fed also modestly boosted its forecasts for the unemployment rate this year, to 3.8% from 3.7% in June, and for inflation. Fed members indicated that personal consumption expenditures, their preferred measure of inflation, will rise 5.4% in 2022. The Fed had forecast a 5.2% increase for PCE in July.

The Federal Reserve made history on Wednesday, approving a third consecutive three-quarter-point hike in an aggressive move to tackle the white-hot inflation that has been plaguing the US economy.

Prospective home buyers (and sellers) probably won’t be too thrilled to see the Fed jack up interest rates sharply once again Wednesday.

“The housing market is feeling the effect of higher interest rates,” said Danielle Hale, chief economist with?Realtor.com, on the CNN Business “Markets Now” show.

“As the Fed continues to tighten and we need to make further progress against inflation, it does raise the odds of further sluggishness in home sales,” Hale told host Alison Kosik.

Existing home sales plunged in August, the seventh straight monthly drop. Housing prices remain high despite the weaker demand and mortgage rates have soared as the Fed has raised rates.

Hale said “homeowners still have a lot of options” thanks to the surge in real estate prices over the past few years. That’s why she thinks sellers might still be more willing to make a deal to get a transaction done.

But Hale said the bigger problem is that it’s more difficult for prospective buyers to qualify for a mortgage as rates continue to tick up. That’s not likely to change anytime soon.

Market experts are worried that the Fed’s series of aggressive rate hikes could slow the economy (as well as profit growth) more than investors currently expect.

“The Fed almost always over-tightens because it uses lagging indicators,” Tom Porcelli, chief U.S economist with RBC Capital Markets, told Alison Kosik on the CNN Business “Markets Now” show. “It has to wait for everything to be out in the open.”

Porcelli, who expects the Fed will raise rates later Wednesday by three-quarters of a percentage point for the third consecutive time, added that a full percentage point hike is unlikely despite strong inflation data because Powell hasn’t prepared Wall Street for such a big move.

“He does not want to spook the market,” Porcelli said.

Still, even another 75 basis point hike will likely hurt the stock market. That’s because the series of big rate increases should eventually lead to a slowdown in profits and the economy.

“People haven’t considered the amount of earnings declines and the impact on the markets,” David Bailin, chief investment officer with Citi Global Wealth Investments, told Kosik.

Bailin said it’s possible that stocks could fall back to their lows of the year from June. And he added that the “boldness” of the Fed’s moves probably won’t be fully felt in the job market for another three to six months.

“There’s a real risk to the economy. It’s why we’re worried about corporate earnings next year,” he said.

To understand the Fed’s thinking, it helps to get inside the mind of its chairman, Jay Powell.?

In his role as the central bank chief, he’s made no secret of his admiration for Paul Volcker, whose name is practically synonymous with fighting inflation at all costs, even if it crashes the economy into a recession, as Volcker’s Fed did — twice — in the early 1980s.?

Powell, in his now notoriously blunt Jackson Hole speech last month, appeared to fully embody his predecessor when he declared that “we must keep at it until the job is done” — (“it,” being rate hikes and “the job” being tamping down inflation.) That was an explicit reference, whether he intended it or not, to the ideology of Volcker, whose 2018 autobiography is titled “Keeping At It.”?

During congressional testimony in the spring, Powell said of his hero: “I think he was one of the great public servants of the era — the greatest economic public servant of the era.”

Part of the reason Volcker is remembered so favorably is because it took a savvy mind and an iron stomach to even confront the problem of rampant inflation, and then implement the painful shock therapy of interest rate hikes that cost millions of people their jobs. Volcker’s plan worked, but it wasn’t easy.?There was indeed some pain, in modern Fed parlance.

Powell faces a similar conundrum. Inflation is the highest it’s been since Volcker ran the Fed, and the central bank itself is facing a crisis of credibility after not moving fast enough to keep rising prices in check.

Credibility was a big concern for Volcker as well.?

“Volcker’s mantra, one he told me again and again through 2008-9,?was that in a crisis the only asset you have is your credibility,” Austan Goolsbee, an economist who advised the Obama administration, wrote in 2019 just after Volcker died at age 92.?

If Powell continues to draw from the Volcker playbook, it’s safe to assume his hawkish leadership is here to stay until inflation gets down to the Fed’s target rate of 2%.?

The market is betting on more big rate hikes from the Federal Reserve…and that’s pushed the 2-year US Treasury yield to 4% for the first time since October 2007.

Investors look closely at the 2-year, especially how it is moving in comparison to the more widely watched benchmark 10-year Treasury yield. The 10-year is now hovering around 3.56%. The fact that the 2-year yield is higher is a phenomenon known as an inverted yield curve.

An inverted yield curve has historically been an accurate predictor of a recession down the road, especially when the curve is inverted for a lengthy period of time and if the curve widens. That’s the case now, as the 2-10 curve, which briefly flipped in April, has been inverted since early July.

The surge in these shorter-term bond rates is largely a reflection of the expectations that the Fed is nowhere close to ending its series of large rate increases. Jerome Powell has talked about how inflation is the Fed’s main focus right now and even has suggested that there will be “pain” for consumers and businesses as it continues to raise rates.

Powell will talk more about inflation and the economy at a press conference at 2:30 pm ET following the Fed’s rate decision announcement at 2 pm.

US stocks opened slightly higher on Wednesday as investors eagerly anticipated the Federal Reserve’s interest rate policy decision.

The central bank is expected to announce a 0.75 percentage point rate hike on Wednesday afternoon. Investors will also be closely watching for clues about future rate hikes and the Fed’s commitment to balance economic growth with controlling inflation.

The Dow rose by 147 points, or 0.5%, on Wednesday morning.

The S&P 500 was up 0.5%.

The Nasdaq Composite was 0.4% higher.

The Fed’s rate hike won’t be the only big news coming out of Washington on Wednesday. The CEOs of seven of the nation’s largest banks are testifying in a hearing before the House’s financial services committee. (The bank chiefs will do it again Thursday in front of a Senate committee.)

Expect the bank CEOs to be grilled about consumer lending practices. But the CEOs are also likely to lament how Washington is making their jobs harder.

According to prepared remarks, JPMorgan Chase (JPM) CEO Jamie Dimon, arguably the most well-known of the top bank heads, is set to say that “the continued upward trajectory of regulatory capital requirements on America’s already fortified largest banks, particularly when not reflective of actual risk, is itself becoming a significant economic risk.”

Dimon claimed that too many rules and restrictions are “bad for America, as it handicaps regulated banks at precisely the wrong time, causing them to be capital constrained and reduce growth in areas like lending, as the country enters difficult economic conditions.”

He said that big banks have to do things that are “illogical…like reducing mortgage exposure in order to drive down assets.”

“Strong and resilient banks that can support the American economy through a crisis are key to American growth and competitiveness,” Dimon added.

The CEOs of Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Truist (TFC), PNC (PNC) and US Bancorp (USB) are also testifying on Capitol Hill Wednesday and Thursday.

Investors should keep a close eye on the Fed’s projections for the unemployment rate, gross domestic product growth and inflation when it publishes its latest quarterly forecasts this afternoon.

In June, the median expectations called for the jobless rate to hit 3.7% at the end of 2022. The unemployment rate hit that level already in August.

The Fed was predicting GDP growth of 1.7% for 2022 three months ago, down from a projection of annualized growth of 2.8% in March. Considering that GDP contracted by 0.6% in the second quarter, following an even steeper drop in the first quarter, it seems unlikely that the Fed will be raising its growth forecast for this year.

And then there’s inflation. The Fed will give projections for its preferred inflation metric, the personal consumption expenditures index, or PCE. In June, the Fed was forecasting an overall PCE increase of 5.2% for 2022, up from 4.3% in March.

The government reported in August that PCE rose 6.3% in the 12 months that ended in July. That was down from a 6.8% increase in June…which was the highest in four decades. Since then, gas and oil prices have fallen sharply.

But another inflation measure, the consumer price index, showed a continued spike in the price of food and other goods in August.

The Fed is going to raise rates later today. By a pretty sizable amount too. But how much higher do central bankers think rates need to go in order to quash inflation?

We’ll get more clues this afternoon.

That’s when the Fed will also publish its latest dot plot, which shows the projected target range for interest rates by the end of the year (in a series of dots) from all of the Fed’s members…including those who don’t currently have a vote on the rate-setting committee.

Based on the last dot plot from June, the median expectation for where rates would finish 2022 was 3.4%, up sharply from a forecast of just 1.9% in March. But estimates for where rates will end this year are almost certain to climb higher given that the market largely thinks the Fed will hike rates by 75 basis points this afternoon, to a range of 3% to 3.25%.

There’s even a small probability of a full percentage point increase today and there are no signs that the Fed plans to pause any time soon either. So investors should expect the dots for 2023 to creep higher as well. In June, the median range for rates was 3.8%, up from 2.8% in March.

The US dollar climbed to a new two-decade high on Wednesday after Russia said it was mobilizing 300,000 military reserves in an escalation of the war in Ukraine.

In a televised national address Wednesday, President Vladimir Putin announced an immediate?partial mobilization?of Russian citizens and threatened to use “all the means at our disposal” to defend Russia “and our people.” He also referenced the potential use of nuclear weapons.

The speech?pushed the greenback up 0.4% against a basket of major currencies to its strongest level since 2002. Investors often seek safe haven in US dollar assets during times of geopolitical tension.

Oil prices also jumped. Brent crude futures, the global benchmark, gained 2.5%, rising to just below $93 per barrel.

Russian stocks slid 3.5% Wednesday after the announcement, adding to heavy losses incurred Tuesday after Putin threatened to hold referendums to annex parts of Ukraine still occupied by Russian forces. The?ruble?also dropped nearly 3% against the US dollar.

Asian stocks pulled back. While indexes in Europe initially dropped, they were last flat or slightly higher in morning trade ahead of the Federal Reserve’s latest policy announcement.

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US stock futures rose a bit after tumbling Tuesday. Investors will be closely watching the Federal Reserve’s policy decision at 2 pm ET and Jerome Powell’s press conference at 2:30 pm ET for clues about future rate hikes and the Fed’s commitment to balance economic growth with controlling inflation.

Dow futures were up 60 points or 0.2%.

S&P 500 futures rose 0.2%.

Nasdaq futures were flat.

The Federal Reserve is expected to raise interest rates on Wednesday by three-quarters of a percentage point for the third consecutive time in an aggressive move to tackle?white-hot inflation?that is plaguing the economy, frustrating consumers and stifling the Biden administration.

Imposing another massive hike would mark the central bank’s toughest policy move in its fight against inflation?since the 1980s?— another period of sky-high prices. It would also likely cause economic pain for millions of American businesses and households by pushing up the cost of borrowing for homes, cars and other loans.

The Fed’s anticipated actions would increase the rate that banks charge each other for overnight borrowing to 3-3.25%,?the highest since the 2008 global financial crisis.

Federal Reserve Chairman Jerome Powell has acknowledged the economic pain this rapid tightening regime may cause.

Investors and economists will be eagerly awaiting clarity on what that “pain” entails.?

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The historic streak of falling gasoline prices is over.

After sinking every day for more than three months, US gas prices edged higher – by a penny – to $3.68 a gallon, on average Wednesday,?according to AAA.

That ends 98 consecutive days of?falling pump prices, the second-longest such streak on record going back to 2005.

The last time the national average price for gasoline rose was June 14, when it hit a record of $5.02. Prices fell every day since then and Thursday would have marked the 100th straight day of declines.

If gas prices begin to rise that could undermine the Biden administration and the Fed’s efforts to keep inflation in check. Falling gas prices are the sole reason America’s consumer prices have remained steady overall during the past few months after rising sharply in 2021 and the beginning part of this year.

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