With Half-Point Hike, Fed Sets Interest Rates at Highest Point Since 2007 Crisis
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In a widely anticipated move, the US Federal Reserve on Wednesday increased interest rates by 50 base points, raising them to the highest level seen since December 2007. However, recent comments by its director indicate the Fed is far from done with rate hikes.
With the most recent increase, the Effective Federal Funds Rate, which governs how much of their assets banks are not permitted to lend to each other overnight, is now set at between 4.25% and 4.5%. The last time it was this high was December 2007, when the Fed was rapidly slashing rates in an attempt to stave off financial collapse.
Ironically, this time the Fed is raising rates, despite wide expectations of a stagnating economy in 2023, because it is the textbook maneuver by fiscal policymakers to fight inflation. The anticipated recession is in part due to the rising interest rates, which put a damper on new investments.
The Fed’s move comes a day after the Bureau of Labor Statistics delivered promising news about inflation, showing the pace at which the US dollar is depreciating has continued to slow. The 7.1% increase in commodity prices in October 2022, as compared to a year earlier, is the smallest increase seen all year, and is seen as reflective of success by the Fed.
However, inflation remains at historically high rates, and little has been done policy-wise to confront what some economists say is the biggest culprit behind inflation: corporate profiteering. According to an April study by the Economic Policy Institute, 58% of inflation over the previous two years was due to corporate profits, not other price pressures like shipping or labor costs.
US President Joe Biden has condemned “war profiteering” by oil giants for selling petroleum and petroleum products at elevated prices, but taken no political action against the practice. Other causes include the boycott on Russian energy products, and manufacturing and shipping troubles created by the COVID-19 pandemic.
Federal Reserve Chairman Jerome Powell said earlier this month that while the central bank might slow down its rate increases in the coming period - something already begun with Wednesday’s move - it might have to reach a higher target EFFR than previously believed, above 5%.
“Historical experience cautions strongly against prematurely loosening policy. I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,” Powell reiterated on Wednesday.
“There’s an expectation really that the services inflation will not move down so quickly so that we’ll have to stay at it,” Powell explained at a news conference. “So we may have to raise rates higher to get to where we want to go and that’s really why we’re writing down those high rates and why we’re expecting that they will have to remain high for a time.”
