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The Federal Reserve hiked its target federal funds rate by three-quarters of a percentage point, sending markets soaring as policymakers hinted at slowing the speed at which they tighten monetary policy.

The move comes after the Fed boosted interest rates in June, July, and September, putting the current federal funds rate between 3.75% and 4%.

“Recent indicators indicate a moderate increase in expenditure and output,” the Board of Governors of the Federal Reserve announced in a statement. “We have seen solid job growth in recent months, and the unemployment rate has stayed low. Inflation remains high, reflecting pandemic-related supply and demand imbalances, increased energy and food prices, and broader pricing pressures.”

Following the news, the Dow Jones Industrial Average increased by 300 points. The statement that policymakers “would take into consideration the cumulative tightening of monetary policy, the delays with which monetary policy influences economic activity and inflation, and economic and financial events.” 

The rate hike follows the release of the Bureau of Labor Statistics’ most recent inflation data, which indicated that the Consumer Price Index grew 8.2% year on year in September, beating experts’ expectations by 0.4%. Despite several categories of energy costs declining, a 0.8% increase in food prices and a 0.7% spike in shelter prices contributed to the headline figure.

The Federal Reserve had set a near-zero interest rate goal and purchased government bonds to bolster the economy for most of the previous two years in order to minimize the consequences of the lockdown-induced recession. Many prominent economists have recently attacked the central bank amid the return to a contractionary monetary regime, claiming that officials who were reluctant to respond to increasing price levels are now causing disproportionate harm in their effort to combat inflation.

Rising interest rates have had a particularly negative influence on the housing market, as higher mortgage rates reduce affordability. According to data from the government-backed mortgage business Freddie Mac, the 30-year fixed mortgage rate has been below 3% for much of the last two years. However, since the start of the year, the rate has increased from just over 3% to almost 7%, with a roughly 1% increase in less than a month.

Following two consecutive quarters of economic contraction, Federal Reserve officials have frequently cautioned markets that economic growth will be “basically flat” in the second half of the year, meaning that the United States has entered a technical recession.

The slowdown in demand brought about by monetary policy tightening has only been partially recognized so far. “The transmission of tighter policy is most visible in highly interest-sensitive sectors such as housing, where mortgage rates have more than doubled year to date and house price appreciation has decreased sharply in recent months and is on track to be flat soon,” Federal Reserve Vice Chair Lael Brainard said last month at a conference in Chicago. “In other sectors, transmission delays mean that current policy initiatives will have their full impact on activity in the coming months, and the impact on price setting might take longer. Demand should be supported by a synchronous fast global tightening of monetary policy.”

Author: Blake Ambrose

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