Policy Changes Ahead For The Fed?

Further Rate Rises Ahead, But In Smaller Increments

The Fed's benchmark federal-funds rate has increased by 0.75 points for the fourth straight time, with the hike approved on Wednesday, bringing it to a range between 3.75% and 4%. Following the choice, Fed's Chairman Jerome Powell stated that the group will discuss a smaller raise at their subsequent meeting in December.

“We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” Fed's Chairman Jerome Powell during Wednesday's news conference

• The Fed indicated intentions to proceed with more increases in interest rates, maybe in smaller steps but to higher levels than initially anticipated
• The pace of monetary policy tightening has persisted at its most aggressive level, since the beginning of the 1980s, when inflation last reached this level

Powell emphasized the possibility that the pace of rate rises may eventually slow stating the following about the timing of rates decreases:

“So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made,”

Has A Recession Become Unavoidable?

There are growing worries that the Fed's initiatives to lower inflation may also push the economy into a recession. Even though the full effects of the rate hikes have yet to materialize, Powell has stated that he still sees a path to a "soft landing" in which there is not a sharp contraction. However, the U.S. economy has showed essentially no growth this year.

• “Policy needs to be more restrictive, and that narrows the path to a soft landing,” Powell said
• In its policy statement, the Fed noted how rate increases reduce inflation and economic activity with a lag
• According to Michael Gapen, chief U.S. economist at Bank of America, continued rate increases of 0.75 percent, or 75 basis points, are risky because “by the time those lags reveal themselves, if you keep going up by 75, you’ve done a heck of a lot more than you really wanted,”

In October, Jamie Dimon, CEO of J.P. Morgan warned the U.S. was likely to tip into a recession in 6 to 9 months. However, he claimed that the American economy was “actually still doing well” at the moment and that consumers were likely in a better situation than during the global financial crisis of 2008.

• Dimon said that while the Fed “waited too long and did too little” as inflation jumped to four-decade highs, the central bank is “clearly catching up.”
• Speaking about the magnitude of a potential recession, Dimon stated: “It can go from very mild to quite hard and a lot will be reliant on what happens with this war. So, I think to guess is hard, be prepared.”

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

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