- The Federal Reserve raised interest rates .5 percentage points
- Smaller than the previous four increases, this hike signals the inflation fight is far from over
- Investors will need to contend with inflation, high interest rates and recession for years to come
Fed Raises Interest Rates
The Federal Reserve raised interest rates .5 percentage points. Only in these twisted times is that considered an easing. True, it is smaller than the four previous .75-point increases. But it is still double the customary quarter-point hike. Prior to this year, the Fed hasn’t raised rates by more than a quarter of a point at a time in 22 years. The Fed has hiked rates six times this year to tame record high inflation. Even though it is smaller, this latest hike will cause pain for millions of American businesses and individuals.1
This rate hike will bring the overnight borrowing rate for banks to a range between 4.25% and 4.5%. That is the highest it has been since 2007.2
The Fed may be reducing the intensity of the hikes, but the effects will continue long after they stop. The average period between peak interest rates and the first rate reductions by the Fed is 11 months. If the bank stops actively hiking rates, they could remain high well into 2024.
Inflation, as measured by the Consumer Price Index, was up 7.1% on an annual basis. That was below expectations and well below the 7.7% in October. Traders became hopeful that the Fed would pivot on this news. They were therefore disappointed by comments from Fed officials.3
Fed Chairman Powell stated that while the reduction was welcome, he needs substantially more evidence that inflation is being tamed. He continued, “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.” He also said that Fed policy is not “sufficiently restrictive”, and more hikes are appropriate.4
No Relief in Sight
Federal Reserve officials expect inflation to prove more stubborn that predicted. It could stay doggedly high for years to come. They anticipate having to raise rates next year more than planned. Their economic projections show they will need to inflict more economic pain to get inflation under control.
Officials expect to raise interest rates to 5.1 percent by the end of 2023. They plan to keep rates higher for longer as well. You can count on rates staying elevated into 2025. Unemployment is predicted to jump and remain high for years. Growth will be much weaker in 2023. A recession is almost guaranteed.
Retirement funds will continue to be squeezed by the triple threat of inflation, high interest rates and recession. The Fed admits that bringing inflation down from 40-year high levels will be a long, hard slog. Investors can hope the Fed pivots away from their policy. Or they can face facts and prepare for an extended downturn. A Gold IRA can protect your wealth from all three threats. Contact us today to learn how.