In comments that lifted U.S. stocks and bond yields, the central bank said it would “take into account the cumulative tightening” implemented so far as well as the “lags with which monetary policy affects economic activity and inflation”. The Federal Open Market Committee also said it would also take “economic and financial developments” into account. Investors interpreted the statement as a light-hearted signal that the Fed was ready to relax in its battle to tackle rising rates, if only temporarily. US stock indexes rose immediately after the announcement with the S&P 500 and Nasdaq Composite hitting session highs. Both the benchmark 10-year bond yield and the two-year bond yield, which moves with interest rate expectations, fell. The statement came after the FOMC voted unanimously to raise the federal funds rate to a new target range of 3.75% to 4% following its last two-day meeting. The US central bank said “sustained increases” in the Fed Funds rate would be necessary to have a “fairly limiting” impact on the economy and bring inflation back to the Fed’s long-term target of 2%. The Fed’s decision to go ahead with another rate hike of 0.75 percentage points comes amid mounting signs that the sharpest inflation problem in decades is not abating. This is despite signs that consumer demand is starting to ease and the housing market has slowed significantly under the weight of rising mortgage rates, which last week rose above 7%. Data released since September showed that consumer price growth is once again accelerating across a broad range of goods and services, suggesting that underlying inflationary pressures are becoming more entrenched. The labor market also remains very tight, with strong wage growth and resurgent job openings. Wednesday’s decision moved the federal funds rate further into “restrictive” territory, meaning it will more forcefully stifle economic activity. Given how far the Fed has already raised interest rates — from near zero as recently as March — top officials and economists are having increasingly urgent discussions about when the U.S. central bank should slow the pace of its rate hikes, particularly since the changes in monetary policy time to filter the economy. Recommended The Fed first introduced the notion of slowing “at some point” in July, and forecasts released at the September meeting suggested support for such a move in December. At the September meeting, most officials predicted the Fed Funds rate would reach 4.4% by the end of the year, suggesting a step down to a half-point rate hike next month. Economists worry that by extending its aggressive tightening program, the Fed risks triggering a deeper recession than necessary, as well as volatility in financial markets. Some Fed watchers warn that recent flashpoints in the UK government bond market, which required the Bank of England to intervene, offer a cautionary tale. Democratic lawmakers also called on the Fed to pull back from its aggressive approach. But Fed Chairman Jay Powell will be hard pressed to reassure economists and investors that the slower pace of rate hikes does not mean a reduced commitment to eliminating price pressures. To that end, many economists expect the Fed to eventually back interest rate hikes beyond the peak level of 4.6% planned for September. A key policy rate of at least 5 percent is now expected to be needed to moderate inflation.
