The Federal Reserve Bank, as expected, this afternoon announced an increase of one-half point in the overnight borrowing rate. The overnight borrowing rate rises to 4.5%, which is the highest in 15 years. Changes in the Fed’s overnight borrowing rate are reflected in consumer interest rates such as in mortgages and on credit cards.
“Job gains have been robust in recent months, and the unemployment rate has remained low,” the Fed said in a statement. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity.”
In a news conference after the rate hike announcement, Fed Chairman Jerome Powell indicated that additional interest rate hikes are likely to be seen next year.
“The Fed”™s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people,” Powell said. “My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks that high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2% objective.”
Powell referred to projections that the Fed will push interest rates to 5.1% by the end of next year and that if inflation subsides enough they could be reducing interest rates to 3.1% by the end of 2025.
“Reducing inflation is likely to require a sustained period of below-trend growth and some softening of labor market conditions,” Powell said. “Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
