On Wednesday, the Federal Reserve raised interest rates again, and chairman Jerome Powell sounded a cautionary note. This time by 74 basis points. He said it will take time for inflation to fall below the two percent target. He also warned that the next hike will likely be much higher than the previous ones. But the question remains: When will the Fed stop raising rates?
Some economists and policymakers argue that the Fed should be more deliberate with its rate increases. It should also consider the cumulative impact of rate hikes. It’s important to note that a single rate increase can have an incredibly negative impact on the economy and inflation. This means the Fed might think it is not necessary to raise rates every six weeks or even every quarter.
However, early signs indicate that the economy will slow down by early next year. Consumer spending is still outpacing expectations, supply chain snarls are easing and wage growth has plateaued, lowering inflationary pressures. Meanwhile, the job market continues to remain strong, making it more difficult for the Fed to cool the economy and curb inflation. Historically, the only way economies have been able to cool inflation is by fueling high unemployment.
While the S&P 500 initially rallied on the prospect of smaller hikes in December and January, stocks fell after news of the latest hike. In fact, the Dow Jones Industrial Average lost more than 500 points, and the S&P 500 lost 2.5%. Many investors hope that the Fed will pivot its messaging and order a slower pace of rate hikes, especially at the start of the year. There was nothing from the messaging of Chairman Powell to make people think the rate hikes will be stopping or even slowing down.