The US Federal Reserve central bank raised its benchmark interest rate by 75 basis points on Nov 2, while signaling it was willing to slow down the pace of rate hikes as the economy cooled.
The announcement by Fed chair Jerome Powell acknowledged the rate hikes’ effects on the economy such as decreased consumer spending, business investment, home prices, and economic output. That could mean the central bank raises its interest rate by 50 basis points in the next meeting in December. “It may come as soon as the next meeting or the one after that, but no decision has been made,” Powell said.
The central bank’s main aim is to prevent runaway inflation. Officials fear that once expectations of higher prices for goods and services are entrenched, workers will demand ever higher wages sending prices still higher. Theoretically, this could send inflation spiraling out of control as prices rise faster than wages.
Not all economists agree with this logic, noting factors outside of employer-worker wage negotiations influence inflation. Powell admitted during today’s announcement that the Fed is essentially guessing when this inflationary spiral might happen, as there are no empirical benchmarks to measure the process, but it is playing it safe.
For now, signs of inflationary pressure have eased slightly. On an annual basis, the personal consumption expenditure price index has fallen from 7% in June to 6.2% in September. “If we saw longer-term expectations moving up that would be very troubling,” Powell said, “and they were moving up a little bit in the middle part of this year, and they’ve moved now back down
The economy has already slowed markedly as borrowing rates have risen. Consumer spending has slowed, the housing market is weaker, and business investment is down, Powell noted in today’s conference. The labor market, however, is still very tight, despite job switching declining somewhat, Powell added. Future rate decisions will take into effect this slowing economy, as well as the months-to-years lag time before the full effect of rate hikes work their way through the economy.
For countries that have suffered under a strong dollar, even this partial slowdown is good news. It gives central banks a chance to catch up to the interest rate policy that the Fed has set—hopefully without crushing their own economies.