Fed raises rate as Powell hints at further rises

The Federal Open Market Committee voted unanimously to increase its policy rate 75 basis points today (November 2), signalling it was likely to hike further.

Fed chair Jerome Powell said there is “significant uncertainty” as to the level of interest rates that would cause the Fed to slow its rate rises. “We still have some ways to go,” he said. “Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

The move brings the Federal funds rate to a range of 3.75–4%. This was the sixth time the Fed has raised the rate in 2022, increasing them by a total of 375 basis points.

Powell said he expects there to be a discussion at the next FOMC meeting about slowing rate rises. “The question to when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive,” he said.

The employment market in the US is still running hot, with open job opportunities increasing by 437,000 in September. There were 10.7 million open jobs in September, the Bureau of Labor Statistics said on November 1, while 6.1 million Americans were hired that month. The FOMC’s last scheduled meeting in 2022 will take place December 13 and 14.

Democratic Senators warn over tightening

Several Democratic members of the US Senate recently cautioned the Fed against tightening too aggressively. Senators Sherrod Brown, chair of the Senate banking committee, Elizabeth Warren and John Hickenlooper were some of the most prominent voices cautioning the central bank.

“Higher interest rates and borrowing costs have not led companies to bring down prices,” wrote Brown on October 25. “The Fed’s actions do not address [inflation’s] main drivers.”

“Around the world, central banks are also increasing interest rates to tame inflation,” Brown argued. “Unfortunately, there is a strong chance these simultaneous individual efforts will amplify each other and produce greater than intended consequences.”

“There are causes of inflation beyond the amount of money in circulation,” wrote Hickenlooper in a letter to Powell on October 27. He said monetary policy cannot deal with labour shortages, supply chain problems and Russia’s invasion of Ukraine.

“The Fed’s bluntest tool is interest rate increases, and it has wielded that hammer repeatedly. However, after five straight rate increases by the Fed, I worry any additional action will undermine economic growth and harm American families,” said Hickenlooper. He said the lag between monetary policy’s action and effect should encourage greater caution at the Fed.

Warren’s letter to Powell said statements from the Fed reflect “an apparent disregard for the livelihoods of millions of working Americans”. The letter was co-signed by 10 other members of Congress.

PCE rate remains unchanged

The Personal Consumption Expenditures Price Index, the Fed’s target measure of inflation, was 6.2% year-on-year in September. This was unchanged from August, and a slight fall from July’s 6.4% and June’s 7%. Core PCE inflation was 5.1% year-on-year in the same month.

September’s year-on-year consumer price index inflation was 8.2%, a slight downtick from 8.3% in August. Excluding volatile food and energy prices CPI inflation rose 6.6% year-on-year. It was 6.3% year-on-year in the previous month.

The Dallas Fed calculated that trimmed mean PCE was 4.7% year-on-year in September, also unchanged from the previous month. Trimmed mean PCE takes core PCE and excludes the highest and lowest price changes.

“The trimmed mean inflation rate is a proxy for the true core PCE inflation rate,” said St Louis Fed president James Bullard. “The resulting inflation measure has been shown to outperform the more conventional “excluding food and energy” measure as a gauge of core inflation,” says the St. Louis Fed.