The Fed: Fed says it may hike interest rates at slower pace, but destination is now 5% or higher

by | Nov 2, 2022 | Stock Market

The Federal Reserve on Wednesday approved the fourth straight jumbo increase in a key U.S. interest rate and signaled rates are likely to go higher than previously forecast. News of a higher terminal rate overshadowed more dovish comments from the central bank statement that it might move more slowly to better evaluate the effects on the economy.

At 2 p.m. Eastern, markets
DJIA,
-1.55%

SPX,
-2.50%
cheered as the Fed, for the first time, signaled in its formal statement it would watch closely whether rapidly rising borrowing costs might damage the economy owing to the usual “lag” in how higher rates slow growth. But equities turned lower after Chairman Jerome Powell’s tougher talk in a press conference. By a unanimous vote, the Fed hiked its rate by 0.75 percentage points, to a range of 3.75% to 4%. That’s the highest level in 15 years. In new language, the Fed said it expects to continue with further rate hikes “until they are sufficiently restrictive” to return inflation to the long-targeted 2% “over time.” Opinion: How Powell pivoted away from the Fed’s dovish message and tanked the markets The Fed also said it 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.” Many investors and economists viewed the language as a step back from the Fed’s aggressive strategy this year. Powell opened the door to downshifting to a slower pace of rate hikes even if the data doesn’t show lower inflation, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. Powell is emphasizing that the Fed has done a lot of tightening already, he added. Powell acknowledged in his post-meeting press conference that at some point “it will be appropriate to slow the pace of increases.” Things took a turn toward the hawkish when Powell said the central bank’s benchmark rate was likely to end up “higher than previously expected.” The Fed’s last forecast estimated its benchmar …

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