Following the Fed’s statement that it will increase the target federal funds rate by 0.75 percentage points, the stock market rose on the belief that the central bank would slow the pace of its recent monetary tightening.
The target range for the Federal Funds Rate is currently between 3.75 to 4%, following three consecutive rises in June, July, and September.
The Federal Reserve Board of Governors discussed the economy and noted sluggish growth during its most recent meeting. Unemployment has been around 8% for some time, and job growth has been sluggish. Food and energy prices have risen dramatically since the epidemic began, pushing up overall retail prices.
The Dow Jones Industrial Average soared 300 points when it was revealed that authorities “would take into account the cumulative tightening of monetary policy, the delays with which monetary policy influences economic activity and inflation, and economic and financial events.” By making this comment, the central banker hinted that rate increases will be slowed down in the future.
The newest data from the Bureau of Labor Statistics show that consumer price inflation in October was 0.4% higher than expected and 8.2% higher than in September. However, rising housing and food costs drove a 0.7% increase in the CPI (CPI).
The Federal Reserve has spent the better part of two years keeping its target interest rate close to zero and buying government assets to avert an economic disaster due to the closure. Reverting to a contractionary monetary system in an attempt to battle inflation has been warned against by prominent economists, who believe that central bank officials, who have been reluctant to react to increasing prices, might wind up doing more harm than good.
The housing market has been negatively influenced by rising interest rates, which have led to higher mortgage payments. Government-backed mortgage company Freddie Mac claims that the 30-year fixed mortgage rate has been hovering around 3% for the past two years. After starting the year at just over 3%, it has surged to well over 7%, with over 1% of the gain coming in the most recent month alone.
Despite warnings from Federal Reserve officials that growth will be “basically flat” in the second half of the year, the U.S. economy has dropped for two straight quarters, officially putting the country into recession.
The drop in demand caused by the Federal Reserve’s tightening of monetary policy has been minimal. Last month, Federal Reserve Vice Chair Lael Brainard spoke at a conference in Chicago, where she said that mortgage rates had more than doubled in the first six months of the year and that the increase in home prices had slowed significantly in recent months and was expected to be flat in the near future. Current policy actions are projected to have a noticeable effect on activity in the coming quarter, but their influence on price formation may take far longer to materialize. A rapid global tightening of monetary policy might be helpful in a world with diminishing demand.
In a similar address last summer, Federal Reserve Board Chairman Jerome Powell emphasized the importance of price stability. He lauded the Federal Reserve for its work in maintaining price stability and emphasized the importance of its position in the economy. Economic growth depends on stable prices. Particularly, maintaining historically low inflation rates is crucial if we are to continue reaping the benefits of the current resurgence in the employment market. The impacts of price rises are felt more keenly by the poor and the working class than by the middle class and the rich.