Less than a week before the crucial midterm elections that will determine which party controls Congress, the Federal Reserve tightened its control over the economy on Wednesday by announcing yet another significant increase in interest rates in its battle against inflation.
In just eight months after sitting close to zero in the wake of the coronavirus outbreak, the central bank’s main policy rate—which affects interest rates throughout the economy—has increased to almost 4% as a result of the move. The Fed’s rate-setting committee also stated that it anticipates the need for additional rises to guarantee that its policies are effective in bringing inflation down from its four-decade high.
Given how much the Fed has already raised borrowing costs and the fact that the central bank’s decisions take time to ripple through the economy, officials gave the impression that future rate hikes might be less than the three-quarters of a percentage point increase announced on Wednesday. The Fed is rising rates too quickly, several Fed observers have cautioned, running the risk of going too far and recognising it too late.
The Fed’s policymakers said in a statement following meetings this week that “in determining the pace of future increases… the Committee 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.”
While job growth is still strong and inflation has barely abated, some economic sectors are already beginning to feel the effects of the Fed’s recent policy changes.
According to a poll from the Institute for Supply Management, which is regarded as a benchmark indicator, manufacturing barely increased in October. Additionally, the housing industry has been severely impacted by the highest mortgage rates in 20 years, which has caused a sharp reduction in home sales and a decline in some region values.
The committee noted that the Fed stated it is still “very alert to inflation threats.”