Money & The Economy

The Fed’s Slowed, But Aggressive, Sixth Hike Closes A Historic 2022

The Federal Reserve announced a hike of 0.5 percentage points, or 50 basis points, to the baseline federal funds rate Wednesday, setting the new range at 4.25% to 4.5%.

The move was widely expected by investors, and although it represents a slowdown from the Fed’s previous four hikes — all of which were 75 basis points apiece — it is the sixth hike since March at 50 basis points or greater, following 22 years where the Fed never hiked more than 25 basis points at a time, according to CNBC. Investors now look to the Fed’s communication over the next several weeks to see if a further slowdown will occur at the Fed’s next meeting in February, or if the so-called “terminal rate,” at which the Fed will halt hikes, might be higher than the market consensus of roughly 5%.

“[T]his pivot seems to contradict previous statements by Fed Chair Jerome Powell,” Thomas Hogan, senior researcher at the American Institute for Economic Research and former chief economist for the U.S. Senate Committee on Banking, Housing and Urban Affairs, said in a statement to the Daily caller News Foundation. “He said they would wait to change policy until they had evidence of clear progress toward their inflation goals, yet core PCE and core CPI remain high. Interest rates, though higher than before, are still negative in real terms.”

Powell and Fed officials have been consistent in their messaging that they will not cut rates or halt hiking until significant progress has been made fighting inflation. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures index, only has data through October, but core inflation — discounting volatility in food and energy — has hovered near 5% since June, well above the Fed’s target of 2%, according to the Bureau of Economic Analysis.

The more up-to-date Consumer Price Index, found Tuesday that while core inflation had fallen from the four decade high of 6.6% set in September, it remained elevated at 6.0% in November.

“This hiking cycle should be over right now,” chief U.S. economist Tom Porcelli of global investment bank RBC Capital Markets told CNBC. Porcelli and RBC believe that “the Fed is fighting yesterday’s war on inflation. … There is no need at this point to continue hiking rates but, of course, they will.”

Stocks are expected to see significant swings in the hour following the announcement, as investors process the Fed’s new policy direction, according to Reuters.

“Because stocks have become so dependent on cheap credit, [a 50 basis point hike] is going to drive markets higher in anticipation of the rate hikes ending altogether,” Heritage Foundation economist E.J. Antoni said in a statement to the DCNF. “The annual change in [inflation] will likely continue trending downward, albeit too slowly. Instead of getting inflation down to zero quickly, the Fed will likely only decrease inflation slowly in the near term. In the long run, the Fed will likely shift from a 2% target to a 3% target for inflation out of political expediency.”

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