On The Money — What the Fed’s latest rate hike means for you
We’ve got five big things you need to know about the Federal Reserve’s move to raise interest rates. We’ll also look at why the rate hike will keep pushing mortgage rates higher and a take on why corporate profit margins are pushing up inflation.
😴 But first, read about the time former President Obama found Bono passed out in the White House.
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5 key takeaways from the Fed’s latest rate hike
The Federal Reserve ramped up its battle against inflation Wednesday with another large interest rate hike amid griping that the central bank’s efforts will plunge the U.S. into a recession.
The Fed boosted its baseline interest rate range by 0.75 percentage points for the fourth time in four consecutive meetings.
The rate increase was the sixth of the year and brought the Fed’s baseline interest rate range to a span of 3.75 to 4 percent.
While the rate hikes marked yet another aggressive move to lower inflation — which has stayed stubbornly high for months — the Federal Reserve sounded a slightly softer tone in its messaging about its future actions.
Rate hikes will get smaller, but they’re not going away soon: Fed Chair Jerome Powell said that point could come as soon as the central bank’s next policy meeting in December. But he made clear that the Fed will continue raising interest rates.
The Fed sees the economy slowing but the labor market holding strong: The economic slowdown is one intended effect of the Fed’s rate hikes. Even so, Powell said the resilience of the labor market is one of several factors allowing Americans to keep spending money in the face of inflation.
Americans will get pummeled by high interest rates: Powell said Wednesday the Fed will need to push its baseline interest rate even higher than officials projected in September. Americans will see the direct impacts in higher mortgage rates, credit card rates and other adjustable rate loans.
A recession will be harder to avoid: Powell acknowledged Wednesday that the chances of avoiding recession were slimming with inflation remaining well above the annual target.
Global turmoil won’t be a deterrent: Powell said the Fed is mindful about how global economic headwinds could affect the U.S. economy, but said the central bank would not ignore its legal mandate to keep the domestic economy strong.
“No one knows whether there’s going to be a recession or not, and if so, how bad that recession would be. Our job is to restore price stability so that we can have a strong labor market that benefits all over time,” Powell said.
Sylvan has it all here.
HOUSING TROUBLE
Fed’s latest hike will push up mortgage rates
The Federal Reserve’s latest interest rate hike Wednesday of 0.75 percentage points is expected to intensify pressure on the housing market while pushing up mortgage rates that already have reached nearly 20-year highs.
The interest hike announced Wednesday is the latest effort by the Fed to slow inflation by raising the cost of doing business. The interest rate hikes are also making new mortgages much more expensive, cooling the housing market while potentially raising the cost of rent.
Before the Fed’s latest announcement, mortgage rates did dip slightly, according to data released Wednesday by the Mortgage Bankers Association. The MBA’s weekly survey showed the 30-year fixed-rate mortgage rate falling to 7.06 percent, down from 7.16 a week earlier, and applications decreasing for the sixth straight month.
Effective mortgage rates have shot up to 7.08 percent from 4.16 percent in March when the Fed first began its rate hikes. They’ve more than doubled from their pandemic low point of 2.65 percent. This has led to a significant decline in refinance activity as potential sellers are reluctant to give up their low rates.
High rates have also encouraged borrowers to pursue slightly riskier adjustable rate mortgages for a lower rate. The average rate for 5-year adjustable rate mortgages decreased to 5.79 percent last week from 5.86 percent a week earlier.
The Hill’s Tobias Burns and Adam Barnes have more here.
CORPORATE GREED?
Rising profits are driving inflation, UBS economist says
A top economist at Swiss bank UBS is warning that high inflation is more the result of rising profits than wages and that Fed Chairman Jerome Powell needs to explain exactly how he thinks higher rates are going to bring down rising prices for consumers.
“Powell’s public remarks offer little insight into how he expects higher rates to tame inflation,” UBS Global Wealth Management chief economist Paul Donovan wrote in the Financial Times on Wednesday.
“The omission matters as the current policy tightening will have an impact through an unusual route. That is because today’s price inflation is more a product of profits than wages.”
Corporate profits have soared during the recovery from the global shutdowns caused by the coronavirus pandemic, with private sector giants from the energy sector to the financial sector posting huge gains.
CEOs on earnings calls in a variety of different industries have said that inflationary expectations are allowing them to raise prices on consumers to increase their margins without scaring them away.
Tobias Burns explains here.
HIRE AND HIRE
Private companies added 240K jobs in October, up almost 50K from September
Hiring in the private sector increased in October compared to the prior month, with private employers adding 239,000 jobs during the past month, according to a new report.
The ADP National Employment Report, which is released monthly and estimates private sector employment levels and pay, found that annual pay rose 7.7 percent on a year-over-year basis.
The number of new hires in October is an improvement from the estimated 192,000 added private sector jobs that ADP estimated in September, but not all industries are expanding.
“This is a really strong number given the maturity of the economic recovery, but the hiring was not broad-based. Goods producers, which are sensitive to interest rates, are pulling back, and job changers are commanding smaller pay gains,” said Nela Richardson, the chief economist for ADP.
Here’s more from The Hill’s Jared Gans.
Good to Know
AFL-CIO President Liz Shuler on Wednesday criticized the Federal Reserve for issuing another interest rate hike, warning that the move will have a “direct and harmful impact” on working families.
Other items we’re keeping an eye on:
New Twitter CEO Elon Musk is standing by his plan to have users pay a monthly subscription fee for a verification badge, telling upset users to “keep complaining.”
The Biden administration on Wednesday announced $13 billion in funds to provide winter heating assistance for low-income Americans, including $4.5 billion through the Low-Income Home Energy Assistance Program (LIHEAP).
That’s it for today. Thanks for reading and check out The Hill’s Finance page for the latest news and coverage. We’ll see you tomorrow.
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